Mortgage earnings coming in hot, but will they stay that way?
Equity analysts are generally feeling good about the housing finance industry's upcoming release of second-quarter results, despite weakness in the broader economy due to the coronavirus.
"The mortgage market remains ‘hot as a pistol’ and is likely to remain so into the third quarter," Henry Coffey, managing director of equity research at Wedbush Securities, said in an email.
Second-quarter results will likely show that lower rates introduced as a form of government stimulus ultimately spurred enough refinancing to offset the impact of tighter underwriting, according to Keefe, Bruyette & Woods.
"You've got this huge refi surge that is overwhelming the fact that you probably did have a tightening of the credit box," said Bose George, a managing direct at KBW.
But going forward, tighter underwriting and elevated unemployment could start to weigh more on origination volumes.
Forecasts for later in the year do suggest that continuing economic stress from coronavirus and the end of the spring home buying could combine to take more wind out of the purchase market’s sails than usual.
However, mortgage forecasts suggest that if rate-driven refinancing remains strong, originations overall will still be higher this year. Total volume is expected to rise nearly 26% in 2020, according to KBW's second-quarter mortgage earnings preview, which averaged its own estimates with those of the Mortgage Bankers Association, Fannie Mae and Freddie Mac.
By comparison, originations were up by a little over 32% last year.
"Mortgage originations are expected to be meaningfully higher this year than last, despite the enormous disruption from COVID-19 shutdowns," investment consultant Josh Arnold said in a Seeking Alpha report.
How much the purchase market contributes to the higher earnings for the industry depends on the home-buying interest of consumers who remain employed.
An index measuring home purchase sentiment has rebounded somewhat after hitting a low not seen since 2011 in April, according to Fannie Mae. It had climbed to 76.5 by the end of June but was closer to 90 before the coronavirus outbreak.
If the unemployment rate remains elevated, it may not only further dampen consumer demand, but potentially force some homeowners to sell, according to CoreLogic, which is forecasting that housing values will stall out for the summer.
Home prices could be 6.6% lower on a year-to-year basis by May 2021 with some regional variations depending on the relative strength of different local economies, according to the company.
But CoreLogic's most recent measure for home prices shows they were up 4.8% year-over-year in May due to inventory shortages that exist relative to demand.
"That’s really been the major support for prices," said Selma Hepp, deputy chief economist at CoreLogic.