Mortgage lenders brace for more housing market headaches in 2019
December 26, 2018 1:26 PM
The mortgage industry heads into 2019 with little relief from the market strains of the past three years. To succeed — or at least survive — lenders must confront three major questions:
— Where are the opportunities to sustain, or even grow, origination volume amid tight housing supply and tepid refinance demand?
— Can loan product diversity and competitive pricing overcome the affordability challenges brought on by rising interest rates, home prices and uncertainty in the broader economy?
— Given the relentless upheaval, is it even worth it to stay in business?
As recently as October, many economists were optimistic that thegood economic times of 2018 would continue into the new year. But the Federal Reserve's year-end interest rate hike, a partial government shutdown and a precipitous drop in the stock market has tempered those expectations.
Even with December's swoon, the economy doesn’t have the same signs of fundamental weakness it did a decade ago. Similarly, mortgage originations project to decelerate, but not face total devastation.
"We're still seeing above-trend GDP growth that is likely to slow as the impact of last year's tax cuts wears off with higher interest rates," Calvin Schnure, the National Association of Real Estate Investment Trusts' senior vice president of research and economic analysis, said in an interview.
As of the third quarter in 2018, the amount of totalmortgage originations declined annually for the fourth quarter in a row. It's a trend expected to continue.
Origination forecasts show a dip to $1.61 trillion in 2019 from $1.63 trillion in 2018, according to Fannie Mae. While a $20 billion decline is small from a percentage point standpoint, it's nevertheless a large enough sum to drive further consolidation among industry firms.
Here's a look at the economic fundamentals that will be key drivers in the mortgage origination and housing market in 2019.
— Where are the opportunities to sustain, or even grow, origination volume amid tight housing supply and tepid refinance demand?
— Can loan product diversity and competitive pricing overcome the affordability challenges brought on by rising interest rates, home prices and uncertainty in the broader economy?
— Given the relentless upheaval, is it even worth it to stay in business?
As recently as October, many economists were optimistic that the
Even with December's swoon, the economy doesn’t have the same signs of fundamental weakness it did a decade ago. Similarly, mortgage originations project to decelerate, but not face total devastation.
"We're still seeing above-trend GDP growth that is likely to slow as the impact of last year's tax cuts wears off with higher interest rates," Calvin Schnure, the National Association of Real Estate Investment Trusts' senior vice president of research and economic analysis, said in an interview.
As of the third quarter in 2018, the amount of total
Origination forecasts show a dip to $1.61 trillion in 2019 from $1.63 trillion in 2018, according to Fannie Mae. While a $20 billion decline is small from a percentage point standpoint, it's nevertheless a large enough sum to drive further consolidation among industry firms.
Here's a look at the economic fundamentals that will be key drivers in the mortgage origination and housing market in 2019.
Moving rates
As purchase originations remain mostly static in the projections, the decline can be attributed to falling refinance originations. The drop-off in refi activity was an issue for 2018 and will probably be one again. The refi market is pressured by greater mortgage rates. While expectations of mortgage rate increases have come down to earth, they're still expected to rise in 2019.
"We've seen periodic worries that they'd be moving much higher — both short-term with the Fed continuing to remove the stimulus they put in previously and also with the long-term. Earlier in the year, the inflation rates had moved above the Fed's target but for the past six months the core personal consumptions expenditures deflator has been running at about 1.5%," said Schnure. "That means the Fed doesn't need to be aggressive. The current market pricing suggests about 50% chance of just one more increase next year. That's a pretty benign interest rate outlook."
Fannie Mae projects 30-year fixed-rate mortgages to go to 4.8% after finishing 2018 at 4.6% and 2017 at 4%. The housing market slowed down over the past year behind the overarching rate climb.
"We've seen periodic worries that they'd be moving much higher — both short-term with the Fed continuing to remove the stimulus they put in previously and also with the long-term. Earlier in the year, the inflation rates had moved above the Fed's target but for the past six months the core personal consumptions expenditures deflator has been running at about 1.5%," said Schnure. "That means the Fed doesn't need to be aggressive. The current market pricing suggests about 50% chance of just one more increase next year. That's a pretty benign interest rate outlook."
Fannie Mae projects 30-year fixed-rate mortgages to go to 4.8% after finishing 2018 at 4.6% and 2017 at 4%. The housing market slowed down over the past year behind the overarching rate climb.
Stunting price growth
The rise in interest rates over the last year weighed on home sales and construction, but people still need houses. While rates are climbing, they're still near historic lows.
"The interest rates are keeping demand in check, but it's not going to push it down. I don't see the real downside risks people are worried about," Schnure said.
In an exhibit of checks and balances, as mortgage rates see an increase,the growth rate of home prices truncates. The median home sale price only projects a 4.1% year-over-year increase in 2019, down from 5.4% in 2018 and 2017's 6.9%.
"The interest rates are keeping demand in check, but it's not going to push it down. I don't see the real downside risks people are worried about," Schnure said.
In an exhibit of checks and balances, as mortgage rates see an increase,
Starting fresh
While rates and home prices hold demand in check, it's still up thanks to the ongoing housing shortage. The disparity between supply and demand is the main feeding line to the growing home prices.
The market still operates at a severe deficit, despiterecent year-over-year gains in housing inventory and increasing housing starts.
With the high demand, any remnant fears of a revived housing bubble popping should be quelled. In addition, improved credit quality went a long way in keeping history from repeating itself.
"A decade ago people were worried, because not only were there mortgages with weak underwriting, but a lot of the borrowers were quite stretched. Underwriting standards have still been reasonably good," Schnure explained.
The market still operates at a severe deficit, despite
With the high demand, any remnant fears of a revived housing bubble popping should be quelled. In addition, improved credit quality went a long way in keeping history from repeating itself.
"A decade ago people were worried, because not only were there mortgages with weak underwriting, but a lot of the borrowers were quite stretched. Underwriting standards have still been reasonably good," Schnure explained.
Strong labor
As underwriting standards came up to keep risk down, credit quality has been on the upswing due to heightened employment.
"We're seeing a solid job market and quite good job growth, which is translating to wages," Schnure said. "You're seeing household income growth that keeps those borrowers able to service their mortgages. This is a market where you can continue to make loans without looking over your shoulder too much."
In 2019, the unemployment rate is expected to plummet to lows that the country hasn't seen since the 1960s.
"We're seeing a solid job market and quite good job growth, which is translating to wages," Schnure said. "You're seeing household income growth that keeps those borrowers able to service their mortgages. This is a market where you can continue to make loans without looking over your shoulder too much."
In 2019, the unemployment rate is expected to plummet to lows that the country hasn't seen since the 1960s.
