TheMReport — News and strategies for the evolving mortgage marketplace.
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26 | Th e M Rep o RT Feature The Long & Winding Path to Recovery F or all of the slow and sluggish descriptions, the housing market recovery might as well be an economic tortoise. As in Aesop's fable, all's well that ends well, right? "Although the recovery in the U.S. housing market has been sluggish from its trough in April 2009, the recovery is real as evidenced by a 466 percent construction surge in multifamily homes and a near doubling for single-family homes," Chan said. Calling it a "gradual recovery," Fannie Mae's Duncan pointed out that most housing indicators, including homebuilder confidence, existing home sales, and single-family starts, have returned to pre-crisis levels with the exception of new home sales. Joseph Murin, JJAM Financial Services Chairman and former president of Ginnie Mae added, "We'll be watching the percentage of first-time homebuyers. They're the lifeblood of the mortgage and real estate industry, and they haven't been there for a few years." CEPR's Baker described the sector as "near normal," citing vacancy rates that have fallen sharply. "Prices have fully rebounded to their trend levels or perhaps a bit above," he added. "The rate of foreclosure is still high, but much closer to trend levels than to recession peaks." "Single-family home building has been disappointing this year, constrained by a lack of skilled labor and tight standards for AD&C (acquisition, development, and construction) lending," Duncan said. "While household formation has picked up since late 2014, all of the net gain in households over the past year was due to renters." Chan said, "Undoubtedly, much of the [household formation] increase has gone to rentals, which now account for nearly 35 percent of new construction compared to a figure of 20 percent prior to the last recession. The rise in activity has still benefited the traditional single-family home sector, too." CoreLogic's Nothaft added to Duncan's point about lenders' tightening of credit standards: "Underwriting has been tighter than 15 or 20 years ago and may have slowed the single-family recovery." What hasn't benefited the housing sector is wage stagnation. That naturally affects consumer spending, which, as mentioned above, constitutes such a huge chunk of economic activity. Stagnation doesn't exactly go hand and hand with the traditional home-buying line about the "biggest purchase you'll ever make." Duncan reported that annual earnings show no sign of breaking out of the 1.8 to 2.2 percent growth range exhibited during the past three years, the Industry PersPectIve Top Economists Had Their Chance to Weigh In, Now Hear From Industry Players L ike a freight train that can turn on a dime, the housing market is deeply rooted in major economic metrics, but also subject to the impetuous winds of the global economy. And then there's the regulatory component. "Beyond these traditional indicators—employment, inflation, and interest rates—there are some X factors that could be of significant impact to the mortgage industry in particular, and therefore bear particularly close watching," said Ben Graboske, SVP of Black Knight Financial Services' Data and Analytics division. "These include actions by the Consumer Financial Protection Bureau (CFPB), the Federal Housing Finance Agency (FHFA) and Congress." Ron Ahlensdorf, Jr., president of Nile, Illinois-based Summit Valuations, LLC, emphasized the key to the sus- tained health of the mortgage market and the considerable stakes involved. The proper balance between mort- gage risk and underwriting policy must be achieved. "Since housing is typically seen as the greatest source of wealth and savings for many fami- lies and is such a large driver of our economy, it is a clear analogue for the economy as a whole," he said. Joseph Murin, JJAM Financial Services chairman and former presi- dent of Ginnie Mae, added another major factor: "I think one of the big- gest market movers will be the 2016 federal and state elections. If history holds true, the anticipation will push the housing market, especially from the mortgage lending segment, into a bit of a holding pattern." Murin thinks the CFPB will continue to dominate the headlines, whether through new regulations or enforce- ment actions. "I will be shocked if TRID doesn't remain the primary topic of almost every segment of our indus- try as we enter the holidays in 2015." "From an REO perspective, we have come very far [since the down- turn]," said Ann Song, VP of asset management at LRES, a Southern California-based appraisal and REO asset management company. "Every- one talks about shadow inventory, but due to the increase in home val- ues, the actual number has decreased significantly." Some statistical valleys are not distant memories, however. In second quarter 2015, the U.S. homeowner- ship rate hit its lowest point (63.4 percent) since 1967, according to the U.S. Census. However, Chan said that the homeownership rate must be weighed against the "sudden jump" in new household formations that have risen from an annual rate of less than 400,000 in 2013 to 1.6 million at present. Fannie Mae's long-term forecast is for household formation to average about 1.2 million during the second half of the decade versus total housing starts of about 1.5 mil- lion per year. Black Knight's Graboske said, "The question is whether the arguably strong economy can overcome what most consider to be the imminent rise in interest rates." Not much triggers industry jitters like an interest rate increase although, as Ahlensdorf of Summit Valuations put it, typically there is a slight bump in home-buying activity at the incep- tion of a rate hike. "For better or for worse, 'Quan- titative Easing' has made the prime interest rate of paramount impor- tance," Murin said. "We've seen a slow, uneven recovery of the housing industry. How much of that is based upon the Fed and how well would it hold up if the rate were to be raised? It will have to happen eventually." Keith Guenther, CEO and co- founder of USRES and RES.NET, foresees continued housing market growth in volume and price in 2016, but his prediction comes with no small amount of caution. Calling the market "extremely fragile" right now, he points to concerns above (see regulatory oversight including the aforementioned interest rate move), below (the active and upcoming mil- lennial job-seekers and their student- loan debt and other financial issues), outside (China) and within (the slow growth of the economy as a whole). Graboske, the Southern California- based data and analytics expert, painted a best-case, worst-case scenario. The downside would see rate increases decimate the refinance market and place downward pressure on home prices. In this scenario, both the "rebirth in home equity" and pur- chase mortgage activity would suffer. The best case: "The economy ex- pands enough to absorb the impact of interest rate increases, while mil- lennials ramp up their transition from renting to homeownership, which lends steam to the continuing solid growth of purchase mortgages and home prices. Plus, home equity lend- ing to existing homeowners surges, as well as homeowners invest in their appreciating assets."