Forecasts for continuing but slower average national home price growth are positive for securitizations, although there is concern that the appreciation can outpace economic growth in areas like California.
"For the securitization market all of this is, pretty much, good news," said Stefan Hilts, director of structured finance at Fitch, in a phone interview on the current home price outlook.
"There is an improvement in delinquency roll rates that is expected to continue, and it's just easier to sell a property if values are going up," he says, commenting on the outlook for older RMBS that often contained distressed/underwater properties that have gone to foreclosure.
Valuations on older properties from this period sunk so low at one point that the relative "overvaluation" concern in today's market is a little threat, and the increase in equity since underwriting tightened protects against existing or potential depreciation in home prices in certain regions.
"Newer [residential mortgage-backed securities] could find values in some areas declining," Hilts acknowledges.
Declines can have an upside in some areas, says Phil Huff, CEO of Platinum Data Solutions, who is one of a growing number of vendors in the industry catering to a growing preference for more localized home price information and analysis. His firm is even working on address-level data and analysis.
Regional home price projections can range from more than a 13% gain for the San Francisco-Oakland-Fremont market in California to declines of less than 2% in areas like Atlantic City, N.J., and Kingston, N.Y., according to Veros' forecast.
"In general, we don't see a lot of bubble activity" but "the acceleration of appreciation is starting to top out" at a national level, said Eric Fox, VP of statistical and economic modeling at Veros, in a phone interview.
"In certain areas there are mini-bubbles. My home state of California has been one of them, but I don't think there is a massive bubble or an Armageddon in the works," said Huff in a phone interview, noting that prices in this market have seen a healthy retraction recently due to factors like seasonal slowing and new regulation within the mortgage industry needs additional processing time to adapt to.
Whether California goes back to "unsustainable" home price trends and bidding wars in many areas or continues with a calmer "ebb and flow" will be interesting to see, he says, referring to it as a bellwether state.
"Even if [housing ] is overvalued by 15%, there is so much equity" in new and recent RMBS that their values will be largely protected from declines, Hilts says.
"It doesn't feel good to those borrowers, but it's nothing like the high amount of negative equity properties" during the 2005-2006 period when underwriting was exceptionally loose and properties and overvaluation was more widespread and extreme at levels around 30%.
"We don't really like the word 'bubble' because the connotation of the bubble is that it has to pop. We don't expect prices to crash. We expect them to return to normal," he says, when asked if the overvaluation in the market can be thought of as a bubble.
"We expect the economy to catch up to prices rather than having prices fall back down to the economy, so that home prices slow, flatten or are slightly negative," says Hilts.
Among factors that have caused home price growth to outpace the economy has been the lack of inventory relative to demand. Contributing to projections for a slowing in this are builders' plans to ramp up to offer more supply, but this will be gradual due to capacity issues, Hilts says.
"It'll slowly ramp up. It doesn't mean ton of inventory hits market as once," he says, noting that the distressed property backlog also will continue to contribute to supply for several years, although it is declining.
"If there is a risk of downturn in price, it is in more inflated markets," Hilts says, noting that this can vary depending on whether the increase in value in these markets has put home prices relatively to their historic norms. For example, Las Vegas' big run-up in prices has only brought it back to historic norms.
Fitch is effectively agnostic as to whether slowing home price growth is a positive for the market because there are both positives and negatives, he says.
"While slowing growth would reduce overvaluation risks, borrowers already in their homes would tend to benefit from rising prices, but the market looking forward is healthier with a growth rate more in line with economic fundamentals," says Hilts.
This appears to point generally toward less volatility in home prices, but Huff warns that there are still a lot of uncertainties in the mortgage and housing markets like new leadership at the Federal Reserve and the Federal Housing Finance Administration, new regulation, and the winding down of the Fed's bond buying.