Rise of the Rentals

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Th e M Rep o RT | 35 O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t ORIGINATION the latest Purchase volumes Fail to lift march applications Application numbers continue to remain weak all around. c ompiling weekly survey results from the Mort- gage Bankers Association (MBA), macroeconomic research firm Capital Economics calculated a 2.9 percent drop in total application volume in March following a meek 0.1 percent increase in February. For just the week ending March 28, MBA reported a 1.2 per- cent decline in applications. All of that decrease can be pinned on a 6.2 percent drop in refinance applications. Over the year, Capital Economics calculates remortgaging applications are down by 65.7 percent. "The earlier remortgaging boom is well-and-truly a thing of the past, and a further gradual rise in mortgage interest rates over the next few years will ensure that remortgaging volumes remain subdued," said property economist Paul Diggle. On the home purchase side, applications came up an estimated 2.7 percent over March (1 percent in the final week) but remained down 16.8 percent year-over-year. While the slight increase "was a step in the direction," it's not near- ly enough to support a housing market that's receiving less and less support from non-mortgaged buyers, Capital Economics said. "Investment and cash buying is likely to soften now that housing is approaching fair value, and it will fall to mortgage-dependent buyers to take up the slack," Diggle noted. "[I]t's clear that the longer mortgage lending flat-lines, the more precarious the housing recovery will look." Originators describe struggles in changing market Adapting to a purchase-focused mortgage market is a bigger concern than regulatory challenges. a ccording to results in Hammerhouse's Fourth Annual Survey of Originator Opin- ions, 44 percent of originators polled said the biggest challenge for the industry in 2014 will be "adding new relationships to sup- port a purchase-focused business" with purchase volumes still too weak to support the market. In other expected hurdles, 23 percent said they're worried about increased competition over a declining business segment, while 21 percent cited concerns about the next phase of regulation being implemented. Despite skyrocketing loan clos- ing costs over 2013's fourth quarter, the smallest share of respon- dents—12 percent—said margin compression and loan costs repre- sent the biggest challenge ahead. Given these obstacles and the continuing decline in mortgage volumes, 69 percent of originators expect overall volume to drop in 2014, though more than half still say they expect to exceed their own personal 2013 production numbers (56 percent admitted to not making their goal last year). "This year is where origina- tors and lenders must come to terms with the new realities of the mortgage industry," said Drew Waterhouse, managing director at Hammerhouse. "The discrep- ancy in industry versus personal expectations relative to origination volume deserves close monitoring as it could signal a coming reality check." Overvalued markets on the rise While some local markets start to simmer, national prices remain undervalued. W ith year-over-year price increases continuing on a double-digit course despite recent slowdowns, the ever-present question has once again come to the forefront for market commentators and analysts: Has the housing market reached bubble status once again? The answer—at least, accord- ing to Trulia chief economist Jed Kolko—is both yes and no. In the company's latest quarterly Bubble Watch report, Kolko estimates na- tional home prices are still around 5 percent undervalued when ex- amining long-term fundamentals like historical prices, incomes, and rents. While ongoing improve- ments in prices have brought the market close to a tipping point, he notes that it's a far cry from the 39 percent overvaluation in the first quarter of 2006. "Even though recent double- digit price gains look unsustain- able, current national price levels are not cause for alarm," Kolko said in a blog post. "Sharp price gains, like we've had in 2012 and 2013, are not the sign of a bubble unless price levels look high rela- tive to fundamentals." Furthermore, "the slowdown in price gains make[s] it less likely that we're heading for another bubble," he added. While the national market is still undervalued, conditions vary widely at the local level. According to Trulia, out of the 100 largest metro markets, home prices are overvalued in 19, including eight of the 11 largest California metros. The great- est danger is along the state's southern coast, in markets like Orange County, Los Angeles, and Riverside-San Bernardino—which make up three of the five most overvalued markets in the coun- try. (The two remaining slots go to Honolulu and Austin.) While the number of overval- ued housing markets is on the rise, Kolko again said historical perspective is needed: "In 2014 Q1, prices were overvalued in 19 of the 100 largest metros, which is the highest number since 2009 Q 4; furthermore, prices were overvalued by more than 10 per- cent in four large metros, which is the highest number since 2008 Q 4. However, at the height of the bubble, all 100 were overvalued, and 91 were overvalued by more than 10 percent."

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