There is a change upon us. Like uneasy animals acting skittish before a storm, mortgage bankers everywhere are demonstrating a wide variety of reactions to their collective sense of impending difficulty. Over the past year it was the bracing for a climate of higher interest rates. Like delusional college kids, who realized during finals week that they need to study up on purchases, because they just heard they were on their exam. Too many mortgage bankers have spent the last year trying to figure out purchases, as if it were a foreign language, when it should have been their primary.
So what do we get for facing our higher interest rate future? Rates not flirting with 5, but with 3, even with the Fed taking away the punch bowl. Talk about mixed messages! But rates in the three’s will be a short lived injection of volume that only delays the inevitable.
So here are some of the reasons there will be more capitulation over the next year, forcing personal and corporate decision making:
First time buyers are not coming back to previous levels for the unforeseen future:
The rising burden of student loan debt coupled with rising rents is draining participation in the housing market. Per Fed Reserve of NY student loan debt rose $31B in first quarter of 2014 compared to 2013 first quarter. Student loan debt has risen from 241B in 2003 to 1.11 T (yes T for trillion) in 2014.
Over the last ten years the percentage of 30 year olds with a home loan has dropped 10%. In the past those with higher education were more likely to buy a home. Now the opposite has occurred and student loan holders are now less likely the non-student loan holders to buy a home. Per the CFPB, “three-fourths of the drop in household formation is due to student loan debt.”
Per NMI holdings, “Based on the median price around the country, research shows that it takes the average first time home buyer 14 years to save a 20% down payment for a home.” That is why you can see 36% of Americans between 18-31 living at home trying to save up while paying down debt. (See my House of Stags blog from February)
Second issue is the pervasive lack of inventory in our desired markets—not just the “most” desired. We are facing historic lows in inventory, 5 months nationally and the lowest in 30 years. So, what is driving it and is it likely to fix itself?
First we have underwater borrowers reluctant to sell. Actually about 6.5M of them. These folks have no equity to tap to be able to trade up or down. Also we have the parents mentioned above who have kids at home post college who can’t sell because their kids need a place to live. They had to borrow for the education and that overhang keeps them in this awkward position, where neither kids, nor parents, can leave.
Second, the appreciating values are causing those who were willing to short sale-the borrower, and those willing to grant the short sale-the bank, to both stop trying to erase debt at a loss as the greed of future housing appreciation looks promising. This standoff locks up a considerable inventory of homes, but becomes self-fulfilling. As the lack of inventory is causing home values to decrease. During first quarter of 2014 existing home sales were down 6.3% and house prices were up 8%.
Third, we mortgage bankers are really good at refinances as mentioned above. We have refinanced most of the planet with rates at an average nationally in the first quarter of 3.9%. Current homeowners won’t want to let go of these rates emotionally and it also keeps the math from working when comparing new payments.
Since 2007 we have been underbuilding new housing due to the recession. In 2005-6 we were running over 2m new units/year, since then we have been less than 1m. So the greatest inventory drops have been in healthy economies like urban Texas and Boston, MA. In Texas they can catch up with inventory faster compared to the restrictive government and lack of land in Boston (or NY).
Homeownership is at a long time low of 65%. Maybe that’s ok. We know that government interference to drop our standards to get to 69% caused the meltdown, so that’s not a solution. But some of these trends haven’t slowed their trajectory, and 65% could become 63% or 61% and that is not good for the country. And especially for the 30% of us who will need to find another way to make a living.
As these realities get coupled with the massive cost of regulation many lenders will choose to leave and especially the boards and private equity behind them. Some larger players will cherry pick their areas to come back into the market, like Citi with correspondent, or B of A to private banking, or Wall St to non-QM. This disruption will create opportunities for those who have the vision and the stomach. Keeping a steady hand with eyes fixed on the horizon, knowing your capabilities, and looking for opportunities, will always get you through. Emotional capital and the desire to play the game indefinitely can keep you balanced safe and sound through this turmoil and for as long as you want to have a home.