Editor’s note: This feature originally appeared in the December issue  of MReport.
It’s been a wild year for the mortgage and housing industries.
Hurricane Dorian plowed through the Bahamas, later lashing the Eastern-seaboard. California felt the forces of nature as wildfires burned more than 77,000 acres and destroyed 134 homes, according to the San Francisco-Chronicle.
Home prices continued their ascent as the months ticked by, with Black Knight reporting in November that home-price appreciation in September rose 0.2% to 3.95% for the month—the highest figure since March. In fact, the average home price, according to Black Knight, is up 54% from the bottom of the market from early 2012 and is 15% higher than the pre-crisis peak set in June 2006.
And don’t forget about the millennials and the nearly eight million first-time homebuyers set to enter the market within the next two years.
What does this all mean as we are set to embark on a new decade? MReport spoke to industry insiders from Fannie Mae, Freddie Mac, Genworth Financial, and more on their thoughts on trends, challenges, and what the coming year has in store.
2019: The Year That Was
One of the main cruxes of the housing market over the past year has been the continual rise of home prices and the related affordability crisis. A recent Redfin survey that 46% of respondents said rising home prices over the past decade have made their lives worse.
Nor are high-priced homes exclusive to markets such as San Francisco and San Jose (both have average home sales of over $1 million). Affordability challenges have reached the heartland as well. Idaho isn’t just known for potatoes—it was home to the highest home-price appreciation in the nation over the past year. CoreLogic’s Home Price Index for August reported a year-over-year price growth of 11.6%. The next highest increase was neighboring Utah at 8%.
Doug Duncan, Chief Economist, Fannie Mae, says that while the cyclical peak in housing activity was seen in 2017, national home prices have strengthened again in recent months amid a fresh drop in mortgage rates.
A continuing factor driving up home prices is inventory supply. Zillow reported that there were more than 100,000 fewer homes for sale in September, representing a 6.4% annual decline. The number of homes for sale in the month was at its lowest level since 2013. Home values rose by nearly 5% during that same time.
"When looking at home prices within each region, the high-priced segment in almost every market has flattened or is falling. At the same time, the price of mid-priced homes in different markets varied by geography depending on local employment conditions. “When it comes to entry-level homes, every market saw an appreciation in prices because of strong demand and a lack of supply,” Duncan said.
Rick Bechtel, EVP and head of U.S. Residential Lending for TD Bank, had a more optimistic look at the past year, calling it “one of the best environments in ages for housing.”
“I think it's a unique environment in which unemployment's low, everybody's got a job, and you've got a really strong economy,” said Bechtel. “At the same time, you have near-record low rates, and that combination usually doesn't come together. Those are usually in conflict with each other.”
The trade-off to the strong economy is the rising home prices, which is something Bechtel believes will continue into 2020.
“As demand goes up, prices go up. There is a complex stew there in trying to figure out how to get housing supply to meet the level of demand at the price point and in the locations that the demand exists today,” he said. “Those are not easy issues and they're not quickly solved.”
Those declining mortgage rates have defined the past year according to Anthony Casa, Chairman of Association of Independent Mortgage Experts.
“We, as an industry, are closely tied to low interest rates, and 2019 proved that relationship, as we saw a direct correlation in both purchase and refinance production and the rise and fall of mortgage rates,” Casa said.
Casa echoed Duncan’s sentiments, saying that the home prices will continue to be a factor in the year to come as homebuilding lags behind demand. Other challenges he foresees will be shortages in skilled labor and rising construction costs.
“Unless those underlying economics improve to the positive, housing will remain costly, both in value and affordability,” Casa said. “While the challenges facing homebuyers will continue, prospective buyers should be educated that now is the time to buy.”
Len Kiefer, Deputy Chief Economist at Freddie Mac, told MReport that sharp declines in interest rates “led to an acceleration in housing market activity. While there was some weakness in the early part of the year, as those higher rates from last fall worked in, we saw the housing market bounce back.”
TransUnion released a study in November that projected eight million millennial and first-time homebuyers entering the housing market by 2022.
Data also found that first-time buyers are younger today than they were a decade ago. The average age of homebuyers declined from 39 in 2010 to 36 in 2018. Consumers between the ages of 25-34 have also seen their share of all first-time homebuyers rise by 6%.
“There has been a lot of discussion in the marketplace that younger people today may not be as interested as prior generations in buying a home and being tied down to one location,” said Joe Mellman, SVP and Head of Mortgage Business for TransUnion. “Our survey results suggest that is not the case at all. Rather, younger people may have in fact been deterred from home purchase by challenges they faced in the financially difficult times of the last decade.”
Mellman added that only 10% of respondents said being tied down to one location would be a reason to delay home purchase.
“Just like others before them, the younger generation seem to place value in homeownership,” Mellman added.
Duncan said millennials, who are buying homes, are more conservative in the amount of debt they are taking on when compared to past generations. He added we have yet to hit the peak of millennial homebuying, and the demand from this segment of the population is “still going to be strong for some time.”
"I just don't see the builders catching up to that demand from millennials. So, a question is on the other end of the spectrum: Will there be a sufficient supply of existing homes as people downsize or there is the death of a spouse or owners sell second homes?" Duncan said.
Duncan said builders are not building a sufficient quantity to the entry-level space, and the baby boomers and Gen Xers are not moving.
Kiefer said the homeownership for those under the age of 35 is only growing, and lower mortgage rates are helping both millennials and first-time buyers. However, these buyers are facing a tight housing market and low supply, and Kiefer and his team estimate the market is 2.5 million units under supplied.
The U.S. added roughly 1.3 million housing units in 2018. Kiefer said that from 1968 to 2008, there were only two years where the U.S. built fewer units: 1981 when mortgage interest rates were 18% and 1991 when there was a recession.
“Even though we've been a decade of recovery, we're still building at recessionary levels, and the result of that is tight markets,” Kiefer said. “You see young adults doubling up, living in shared living arrangements, not forming households, and affordability being a major challenge in the market.”
Builders, Duncan observed, are simply not building a sufficient quantity of homes for the entry-level space, and the baby boomers and Gen Xers are not moving.
Even if they can find a home that fits their needs, there’s still the matter of simply having enough to afford the home. As Bechtel pointed out, however, there are many programs for millennials and first-time buyers that cover support, down-payment assistance, and closing-cost assistance.
"Through our surveys and in regular conversations with homebuyers, we continue to find a staggering number of people who think they have to have 20% down to buy a house,” Bechtel said. “Many people still seem to believe that you've got to have perfect credit and a large down payment, but in reality there are many programs out there to assist homebuyers.”
The Tech Frontier
The move to technology has been swift and evident over the past year. Companies are not only making a move to tech, but they are investing big money in it.
SnapDocs announced in November that it raised $25 million so it can continue to develop AI so that homebuyers can “close on their dream homes faster and with far less stress.”
Ribbon is investing $330 million to expand into new markets and accelerate product development.
“The real estate market is rapidly evolving as consumer demand drives innovative solutions forward,” said Matt Harris, Partner at Bain Capital Ventures, in a release from Ribbon.
Rajesh Bhat, CEO and co-founder of Roostify, said prices, tight inventory, and the lack of affordability would continue to be an issue in 2020. However, he noted that one opportunity to alleviate these issues is to lower origination costs through the digitization of the application processes.
Dan Sogorka, CEO of Cloudvirga, told MReport that the biggest technological change over the past year had been the rise in online real estate services for both buyers and sellers.
“Searching for homes online has been mainstream for nearly two decades now, but the actual selling process has been handled by local real estate professionals—until recently,” Sogorka said. “Consumers can now receive offers instantly by selling their home to internet-based real estate companies.”
He said customers have prioritized convenience, and the idea of being able to sell homes quickly, without holding open houses, putting homes on the market, or stressing about finding the right buyer has become more appealing.
Sogorka added that this is an example of technology “giving the real estate industry a lift,” and that it is all possible due to machine learning and AI, which allows real estate companies to use data and analytics to understand the expected value of a property.
“We know automation is a key factor in increasing efficiency and reducing costs in any industry, but it’s especially critical in the housing and financial services sectors,” Sogorka said. “The $8,611 price tag it takes to manufacture a single loan is astronomical, and it ultimately gets included in the lender’s total price and passed along to borrowers.”
Joe Welu, CEO and Founder of Total Expert, said technology had made loan approval faster and more accurate over the past year. Welu said this had been a benefit in a heavy-refinance market—a sector where transactions that are on a fast clock.
“As we move back to a purchase-focused market in 2020, lenders must master long-lead customer engagement because it takes four to five months for customers to find a home after loan pre-approval,” Welu said. “If lenders don't automate their human touch and follow-ups, they will lose purchase customers during this home shopping period.
Sogorka added that the companies able to leverage AI will cut their costs and take the market share during these competitive times—especially with consumers expecting “every buying experience to be fast, cheap, and hassle-free.”
Welu said AI is similar to a smart loan officer assistant that “humanizes customer engagement” on long-lead purchases business. Welu, though, said automated customer engagement must come via loan officers and not robots.
“Lenders can control this type of AI to their needs, and it's always best to have each touch—whether text, email, voicemail, etc.—come from the loan officer and not a generic address.”
“For automated loan approvals, technology must enable a seamless digital/human link where a loan officer and their processing/underwriting teams can intervene immediately with anything that can't be automated,” Welu continued.
Looking ahead to 2020, Sogorka said the industry needs to work to being all aspects of homebuying into “one seamless experience.”
“Today, borrowers can apply for mortgages through their lenders, find realtors and property on a real estate website, select insurance with their provider, and sign and close on their homes with their title company,” Sogorka said. “All these pieces are inherently interconnected, yet handled by different providers with different technology.”
Welu added that all advancements in technology over the next year must improve on giving customers a hybrid experience—in home searches, loan approvals, customer acquisition, and marketing.
“It's not enough to simply automate these processes. The winning banks, lenders, and real estate companies in 2020 will master how to digitally enhance the human touch,” Welu said.
Caroline Reaves, CEO of Mortgage Contracting Services, said the mortgage industry “revolves around the use of images,” and the manual review is costly, time consuming, and labor intensive. The use of AI in image review is one of the main advancements she sees taking place next year.
“Automatic image classification will help to reduce (and over time eliminate) the need for human review of images. The use of AI in this area will continue to grow,” she said.
Additionally, she said Robotic Process Automation is another key area that holds enormous potential. Early implementations of this technology, Reaves said, allowed MCS to free staff from performing law-value tasks and to focus on activities that add more value to the business.
Economists and Wall Street signaled recessionary warnings in August as the Dow Jones crashed more than 800 points, and the 10-year Treasury yield briefly broke the two-year rate for the first time since 2005—an economic marker that has often proved a forerunner of recessions in times past.
The market recovered, and Wall Street is touting record highs. Despite the seemingly favorable stock market, however, there are still some who believe a recession is possible, even as soon as the 2020 Presidential election.
Casa said it is “too early” in the current cycle to begin predicting recessionary fears, as there has not been one-quarter of negative growth in recent months.
“It takes two quarters in a row of negative growth to call a recession,” Casa said. “Recessionary fears would have to impact the major tailwind to the U.S. economy now that is consumer spending. If you keep an eye on consumer spending, that performance may become an observable predictor of a looming housing market slowdown.”
Duncan agreed that it is unlikely that a recession would occur in 2020 unless there is a “major blow up in trade” tensions or some other significant global factor. Overall, he said the U.S. economy is doing well.
“Fears of a recession would be driven by a decrease in consumer confidence which is largely impacted by unemployment rates/jobless claims,” Bhat observed. “The result would be a challenge in the ability to purchase a home and a possible uptick in the foreclosure rate due to changes in ARM rates.”
The question to ask, says Duncan, is how much will economic growth contract if and when a recession comes.
“The mortgage credit that has been extended is very high quality. It's delinquency and serious delinquency levels are at over 20 or lows. We can see that the millennials who are buying homes are actually much more conservative in terms of the amount of debt they're taking on than their parents or their parents' parents,” Duncan said. “One of the lessons of the crisis was not to overextend and it appears that that message has gotten through reasonably well.”
The question to ask, Duncan noted, is how strong will that next recession be if, and when, it eventually comes, which will significant implications for housing.
“The mortgage credit that has been extended is high quality. Delinquency and serious delinquency levels are at over 20-year lows. We can see that the millennials who are buying homes are actually much more conservative in terms of the amount of debt they're taking on than their parents or their parents' parents,” Duncan said. “One of the lessons of the crisis was not not to overextend, and it appears that that message has gotten through reasonably well.”
Kiefer said his team at Freddie Mac is calling for no recession in 2020, but said it would be “very damaging” to the housing market if one did occur. He added that some of the reason for recessionary worries is that the economy is going on its 11th year of expansion, and growing concerns surrounding a trade deal with China have led some to believe a recession is possible.
Tian Liu, Chief Economist, Genworth Mortgage Insurance, noted that “while the overall U.S. economy remains robust, we have seen a slowdown in recent quarters. I think if you look at current interest rates, they clearly reflect a higher level of uncertainty in the economy today compared to 2017.”
The question for Liu is whether the economy will continue to see a strong consumer sector. The U.S. economy is currently in its longest expansion on record, and consumers are reaping the rewards of stability in their jobs and income growth.
Another beneficiary of the strong economy, according to Liu, is housing.
“When you look at the housing market, when interest rates came down and home-price growth slowed, making homes more affordable, you saw a lot of willing buyers out there in the market,” he said. “That is meaningful because housing is the single largest purchase for most people.”
Looking Ahead to 2020
Casa said the biggest theme over the next year will be if mortgage brokers continue to grow, and “finally uniting,” taking their message to Washington D.C.
“Mortgage brokers will begin to promote and applaud wise legislation that will positively impact loan officer compensation, tax reform and the equal and fair treatment of veterans’ access to housing,” Casa said. “2020 will be the year of the mortgage broker.”
Duncan said he believes the Fed will take no further action on interest rates, but he noted that one more rate cut in Q1 2020 is possible.
Baht said the collaboration of participants in the mortgage ecosystem—lenders, GSEs, and fintech providers—and their ability to work together would be interesting to follow in 2020. He said it would be vital in 2020 if these entities can come together to solve challenges facing home lending, inventory levels, affordability, housing reform, and federal versus state legislation.
Keifer expects 2020 to showcase the same trends that were around in 2019—most notably the continuing emergence of the millennial and Gen Z generation as key players within the market.
“Those demographic forces, they're going to provide a lift to the housing market. Folks are going to continue to see young adult homeownership rate rise, you're going to see household formations continue to rise,” Keifer said. “Folks may notice that and say, ‘Wow, that's really starting to move the marketplace.’”
Bechtel commented that “2020 is going to be so newsworthy,” but unsure if it will all be a distraction or anything of actual substance.
“The challenge will be to separate the noise,” he said.
Liu said lower interest rates had a “huge impact” on housing over the past year, but says 2020 poses the challenge of how the housing industry can deliver affordable homes if rates change.
“It’s unlikely we will continue to see a huge tailwind from lower interest rates, so the housing industry should focus on delivering value and addressing the challenge of how to deliver affordable homes to homebuyers,” Liu said.