Lately, there has been much discussion about the decline in mortgage originations. Refinances are down and purchases are nowhere near the levels necessary to stem a drop-off on origination volume. Latest forecasts for 2013 estimate $1 trillion in origination with many concerned it will drift lower over time.
Rates are expected to go up, adding headwinds to purchases. Refinances are almost tapped out as over 80% of the $10 trillion market was originated with historically low interest rates. It’s easy to get caught up in the concern that originations will fall to a 15-year low with expectations to scrape the bottom.
This sounds like when the U.S. stock market fell way below Dow 7,000. People predicted it would take many years to recover the lost ground in the drop from Dow 12,000. In a few years, the stock market not only recovered, but showed amazing strength in its rebound. The real estate and stock markets are thought to have common behavior patterns, since there is a supply and demand curve that drives price.
We saw housing come back strong in 2013 with 12% home price appreciation because of consumer demand. In 2014, a predicted 4% to 5% appreciation can mean a 20% to 25% return on a leveraged basis since most homeowners have a 20% downpayment. The balance sheet for homeowners is getting stronger. As of the third quarter, homeowners gained $2 trillion of new equity through home price appreciation across close to 90% of metropolitan areas. We can easily foresee a $13 trillion untapped home equity market (due to the combination of new mortgage downpayments, amortization on performing loans, and home price appreciation) to drive continual strength within the housing market.
History can provide some great perspective. In just under four years from 2000 to 2003—the size of the mortgage market increased by almost 400%, as mortgage originations grew from just over $1 trillion to $3.8 trillion. How can our industry achieve more sustainable growth?
For years after the start of the housing crisis, renting was viewed as a smarter alternative, since owning a home was viewed as throwing good money after bad. Although renting sounds easier than owning, it does not have the same economic and social benefits. Given the low cost of mortgages and the potential tax benefits, it is hard to justify long term renting. Plus many households are being formed each year, requiring new housing. It makes good business sense to provide sound and safe housing options to first time homebuyers including affordable housing. When you think about basic demand for housing, there are tremendous drivers for growth.
The tables are turning in favor of homeownership. Yet the National Association of Realtors reported housing inventory fell 9.3% at the end of December, to 1.86 million available homes, which is about a 4.6-month supply at the current sales pace, and has been driving up pricing and the resurgence of new construction lending to add housing stock. One way to meet the growing demand is through new construction. It is predicted 2014 will bring in excess of one million new homes, up 14.6% from one year ago. In fact, January marked the third consecutive month of increase, which is good for housing stock and millions of new jobs.
To be sure, lenders will face challenges in taking advantage of increased demand, given overhead expenses from new compliance requirements.
It is agreed that the Consumer Financial Protection Bureau’s introduction and enforcement of the ability-to-repay/qualified mortgage rule will create much safer mortgages. Yet the cost of safety and soundness comes at a price. The new ATR/QM rule, buyback risk, demand for compliance expertise and growing capital requirements are taking a toll on staffing and budgetary concerns. When not managed effectively, this can introduce tremendous cost and complexity to origination and servicing organizations.
Nevertheless, the housing market is on the road to recovery, albeit a long one. As we discover the origination, servicing, technology and compliance solutions to make lending easier and attainable for more borrowers, our market can quite easily pass $2 trillion in annual production in the next three years even if mortgage rates climb pass 5%. History provides great context—our industry did $3.8 trillion when mortgage rates were almost 6%.
Paul Imura is a senior executive of ISGN where he heads up the global marketing and strategy division.