A perfect mortgage storm may be looming
The mortgage industry may be looking at an unusually difficult year in 2018, unless some of the trends we’re
seeing in the market today suddenly change course.
While it’s no surprise to anyone who’s been following lending trends, the refinance market weakened tremendously
in 2017, despite mortgage rates increasing only marginally on a year-over-year basis. What this suggests is that most
of the borrowers who might have benefitted from refinancing into a lower-rate loan — and who qualified for such
a loan — may have already done so. With most economists forecasting another increase in the federal funds rate
as soon as next month, it’s not unlikely that we’ll see mortgage rates inch up a bit more after the first of the year.
Loans are still being refinanced, of
course, but the borrowers tend to
be doing cash-out refinancing to
pay down higher-priced debt, college tuition or home-improvement
loans. The overall volume of refinanced loans, however, looks like it
will continue to trend down.
Typically, when we’re in one of
these cycles, purchase-loan volume increases and tends to offset
the loss of refinance volume. There
may be a “perfect storm” brewing,
however, that doesn’t result in that
The biggest problem facing the industry next year is likely to be the
extraordinarily low levels of housing stock available for sale. Already
at some of the lowest levels in recent memory, the supply of existing
homes for sale dropped 6. 5 percent on a year-over-year basis, from 4. 5 months’ supply in August 2016 to 4.2 months’
supply this past August, according to a report from the National Association of Realtors. Equally problematic,
first-time homebuyers accounted for only 31 percent of purchases this past August, much lower than the nearly
40 percent share of the market they represented historically, suggesting that entry-level inventory remains
especially elusive. The lack of supply is driving up median existing-home prices, which hit a new peak of over
$281,000 this past July, according to Black Knight.
One of the reasons for the limited inventory of existing homes for sale is that roughly 10 percent of all borrowers
are still significantly underwater on their loans, owing more than 125 percent of what their home is worth,
according to Attom Data Solutions. These borrowers also aren’t candidates for traditional refinance loans.
As a result, about 5 million borrowers simply can’t participate in any sort of mortgage finance activity.
New-home inventory, while improving slowly from the bottom of the market back in 2012, is still 50 percent
below the prior peak in 2006, and roughly 100,000 units below what would represent a normal healthy market.
This low supply of existing and new homes, and escalating prices, makes a full recovery in the housing market
difficult to forecast for 2018. If there’s no inventory to buy, there’s no need for borrowers to apply for a mortgage,
and rising prices make it difficult for people to afford the homes that are available.
Speaking of “perfect storms,” the impact of hurricanes Harvey and Irma can’t be overlooked either. Texas and Florida
account for about 20 percent of home sales and are two of the most active markets for homebuilding. The devastation in those two states will have a material effect on homebuilding, home sales and, by extension, home loans.
And the resources — labor, materials and capital — that will be dedicated to rebuilding areas damaged by the
hurricanes is likely to slow down new-home construction elsewhere, which will exacerbate the inventory problem.
Given these unusual circumstances, home sales might actually dip slightly in 2018, rather than continue to improve in the gradual manner we’ve seen over the past five years. We’re likely to end 2017 with about 5. 4 million
existing-home sales and roughly 600,000 new-home sales — both at the very low end of the range most analysts
predicted at the beginning of the year. If those numbers are flat — or down a bit — in 2018, combined with the
continued weakening of refinance activity, there could be rough waters ahead for mortgage lenders. n
Rick Sharga is executive vice
president of Ten-X. He is one of the
country’s most frequently quoted
sources on real estate, mortgage
and foreclosure trends. Sharga has
appeared on top television shows and
briefed government organizations and
corporations on foreclosure trends.
He also conducts foreclosure training
for leading real estate organizations.
Before Ten-X, Sharga was an executive
vice president and primary spokesman
for Carrington Mortgage Holdings.
Reach Sharga at email@example.com.
New-Home vs. Existing-Home Inventory
Source: U. S. Census Bureau, National Association of Realtors and Ten-X Research
New homes for sale Existing-homes for sale
Year to date through July