Editor's Note: This feature originally appeared in the December issue of MReport, out now.
The year 2018 has been a good year for the economy that posted a solid GDP growth of around 3 percent in October. Unemployment, another key indicator of the economic health, is falling and the Bureau of Labor Statistics recorded more open positions than unemployed at over 7 million compared with under 6 million for the latter. Yet, a recent Bloomberg report pointed out that the housing market “remained a weak spot posing the third consecutive drag on GDP growth with a contraction of 4 percent.” The year has clearly not been as good for housing as it has been for the overall economy. Will 2019 bring some relief?
To know the future trends, we first need to understand the present. Recent housing market data indicates a slowing down amid higher prices, rising mortgage rates, and a shortage of affordable inventory. Home sales have been falling consistently over the past seven months according to the National Association of Realtors’ (NAR’s) Existing Home Sales data that reported a decline of 4.1 percent in home sales at the end of September compared with the same period last year. NAR also predicted that home sales would flatten in 2019 as home prices continued to grow.
But the latest S&P CoreLogic Case-Shiller Home Price Index found that home-price growth might be softening. For the first time this year, the index registered a home-price growth below 6 percent in August 2018. “Following reports that home sales are flat to down, price gains are beginning to moderate,” David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices, said in the report.
On the bright side though, the pressure on inventory, that was an overarching concern for the industry for most of 2018 seems to be easing a bit. The inventory of homes on the market grew by 2 percent nationally in October for the first time in four years, according to a report by Realtor.com. Are these indicators then a harbinger of another crisis for a market that finally pulled itself out of a recession only a few years ago? Not really.
ears ago? Not really. “Think of it as a pause, rather than a slowdown,” advised Sam Khater, Chief Economist, Freddie Mac. “As long as the economy remains hot, housing should remain active.” The signs, according to Khater, have been there since late 2017, starting with the deceleration of home sales at that time, the rising mortgage rates since mid2018, and the “fairly elevated home prices” for most of this year. But it is the decline in affordability that has caused the biggest lag. Having said that, these five trends are likely to shape the housing market in 2019.
1. The Rate Roulette
Khater’s sentiments are echoed by Frank Nothaft, Chief Economist at CoreLogic who saw rising mortgage rates as a key factor affecting the affordability of homes in the lowest price tier. While mortgage rates have averaged 4.9 percent recently, Nothaft noted during a recent webinar that the consensus in the marketplace for the coming year was towards an upward pressure of close to 5.2 percent by the end of 2019. “That will place mortgage rates at their highest level since 2009,” he said.
For first-time homebuyers, especially millennials who were looking to transition from renting to homeownership, these rising rates would likely make them pause their decision. And not without reason.
“For millennials who have been familiar with an extraordinarily low level of interest rates, they’ll see the highest mortgage rates that they have seen in their adult lifetimes,” Nothaft said. “Just over the last year, with the rise in mortgage rates coupled with the increase in home prices that translates to an approximate 20 percent increase in just this one year in the monthly principal and interest (P&I) payment to buy exactly the same home that you could have bought a year ago. In contrast, rents are rising about 3 percent on single-family homes and that underscores some of the challenges that millennials may be facing in the coming year in making that switch from renting to homeownership.”
Home prices and mortgage rates are two key hurdles that Doug Whittemore, Head of Mortgage and Consumer Default Services at U.S. Bank, also foresees. The combination of rising home prices and mortgage rates could mean that the monthly P&I equivalent for the median home was likely to jump as much as 30 percent in 2019, compared to last year, if all things trended as projected.
Sonu Mittal, SVP and Head of Retail Lending for Citizens Bank Home Mortgage, echoed this sentiment. “Rising rates, combined with home-price increases and low inventory in most markets in the U.S. are impacting affordability in 2018 and will likely continue to factor into affordability in 2019.”
Existing homeowners, too, will feel the pinch of rising interest rates. “Considering the majority of the market now sits with a 30-year fixed-rate mortgage below 4 percent, an existing homeowner could find a scenario where they would spend significantly more for less house than they already have,” Whittemore observed. “Jumping from a rate of 3.75 percent to 5.5 percent would result in a 22 percent increase in P&I for the exact same home.”
The 5.5 percent projection by Whittemore is not far off the mark either with both Khater and Nothaft pointing to the possibility of rates rising to around these levels in 2019. “Rates have increased this year more than I would have expected if you would have asked me at the beginning of this year,” Khater said. “If you go back to September of 2017, they were down in the high three’s, and here we are already knocking on the door of 5 percent.”
As far as existing homeowners are concerned, Nothaft projected rising rates would also mean that there would be less homeowners moving and putting their homes up for sale. They would be more likely to “choose to stay in the same home for a bit longer and choose to make improvements in their current home. So inventory levels are low relative to what they have been and that’s working to depress home sales.”
Apart from home sales, affordability has been impacted by the continued rise in home prices outpacing wages and the slowdown in construction activity in the affordable space, according to Kathy Cummings, SVP, Bank of America. But, she said that lenders were looking to help homebuyers achieve homeownership, especially if they were creditworthy borrowers. What is important is education and preparing for homeownership.
“According to Bank of America’s Fall Homebuyer Insights Report, 72 percent of millennials are prioritizing homeownership, and 38 percent of first-time buyers are looking to buy in the next two years, so it is important to educate prospective buyers on how homeownership can be achievable,” Cummings said.
Giving an example of Bank of America’s low down payment programs, she said that not only did such programs provide low down payments and competitive rates, they also helped eligible buyers look into down payment and closing cost assistance programs available in their community.
“A lot of would-be buyers are currently renting, and as rents increase, they’re not able to save as much or quickly enough to afford a down payment in the near future,” observed Mittal. Despite rising rates though, Mittal said that buying a home was still more affordable than renting in the long run. “As homebuyers compare a mortgage against the rent they would pay, even with rising rates, many would find that buying a home would be a cheaper option
and has many long-term benefits, most notably the opportunity to build equity,” Mittal said.
However, rising mortgage rates are only one part of the problem. Housing supply, especially at the lowest price-tier—the one that first-time homebuyers look at—is an issue that will be observed closely in 2019.
2. The Inventory Conundrum
It’s true that supply has increased slightly over the past few months. But the paucity in home inventory has impacted home sales and prices through most of the year, in fact, according to Khater the chronic lack of supply has actually been “a decades-old issue, but was only masked by the last boom and bust.”
Giving the example of manufactured housing—a traditional source of affordable supply—he said that property types that were historically affordable were decreasing consistently over the past few decades. “Manufactured housing boomed between 1993 and 1998. It busted in 1998, and has not recovered since then. We are producing about 90,000 manufactured housing units today where we used to be up in the 300,000s during the boom for these units,” Khater said. Explaining the impact of inventory on competition among homebuyers, Nothaft said, “The months of supply available for sale over the past year has been running at the lowest level that we have seen in the last 20 years and consequently, the amount of time that a home is on the market before it sells has really shortened. So the percent of homes selling within 30 days of their listing has risen over the last couple of years.”
Looking at 2019, Jeff Taylor, Founder and Managing Director of Digital Risk, projected that housing supply would remain tight. Khater agreed, “We’re just not building enough,” he said, adding that one way of starting to solve the problem was to approach policymaking from the supply angle. “Unlike past cycles which could be managed by sorting demand, the problem this time is on the supply side and there are no federal interventions or levers to deal with that,” Khater said, adding that while states had the ability to intercede they delegated to the localities.
“But some states are starting to rethink and are looking at intervention in a variety of ways such as increasing production or looking at rent controls. Creating policies and incentives to increase production are the two main ways to solve this issue,” Khater observed. “The problem is that you have local resistance in the form of homeowners who are concerned that the increased supply will lead to a decline in home values.”
3. Price Pains
Inventory’s also affecting prices, especially at the lowest price points of the market. “Sellers are pricing their homes higher and higher as they want to make a big profit from their last purchase, but all this seems to do is force prices even higher, particularly for today’s first-time buyers,” said Matt Clarke, COO and CFO, Churchill Mortgage, observing that the low inventory was also affecting the purchase loans market. “Homes may not be so “overvalued” today, but rather, “overpriced, with a severely limited supply of affordable housing.”
Looking at 2019, Whittemore projected that although the pace of home price appreciation was slowing, forecasts for 2019 still showed a 4-6 percent home price growth annually across the country with some markets in California seeing double-digit growth. “If home price growth continues to exceed wage growth, the spread for a firsttime homebuyer will continue to be a problem until rates come down, home prices drop, or wages grow. I don’t see the latter happening fast enough.”
However, home prices have been softening in the recent months and Taylor projected that this trend is likely to continue into the next year. “Prices may come down a little bit because ultimately, people are trying to price to what somebody can afford to buy the house at.”
The forecast though calls for a slowing in the rate of appreciation to about roughly 3-4 percent over the next couple of years. “I think that’s good and that it’s really important that we see a slowing in home price growth,” Nothaft said.
4. Rising Equity
Prices and home values will also be the biggest opportunities for growth for some of the markets, especially those that are seeing a rising influx of homebuyers from the more unaffordable markets. “If you look into the open West, meaning markets like Reno, Carson City, Boise, Coeur d’Alene, Provo, and Salt Lake City, all these medium-sized Western markets are booming of an outflow from the unaffordable West Coast coastal markets like San Francisco, San Jose, Los Angeles, and, to a lesser extent, Seattle,” Khater said.
And while prices are likely to soften, homeowners have seen their equity grow manifold over the past few years. In fact, according to a TransUnion study, household home equity, currently nearing $15 trillion, has surpassed its prior “housing bubble” peak in Q1 2006 by over $1 trillion.
“Home equity levels have been rising at a rapid rate each year since hovering around $6 trillion between 2009 and 2011. While the S&P/Case-Shiller House Price Index (HPI) increased by 42 percent between Q1 2011 and Q1 2018, home equity levels outpaced home prices in that same timeframe,” the study revealed.
For lenders, already grappling with drying up refinance loans, this could provide a world of opportunity, especially in home equity lending. According to Joe Mellman, SVP and Mortgage Business Leader at TransUnion, “The recession caused a home equity lending pull-back, which all but eliminated consumer marketing and education. We think there’s an opportunity to re-introduce that education to consumers and help them evaluate how and when tapping home equity could make sense.”
Mellman was particularly optimistic about the long term rise of home equity lines of credit (HELOCs) moving forward. “HELOC’s are going to be a primary driver of home equity lending products,” he said. “We have observed that this segment has been growing for the past seven years and will become even more important as cash out refinancing options decline because of the rising mortgage rates.”
But HELOCs aren’t the only opportunity for lenders going into 2019.
5. Innovation in Lending
We’re seeing a lot more non-QM products and similar types of loans coming to the market. People are looking to expand their credit box and see what types of different loans they can put in the marketplace and what the appetite might be from the investor base,” Taylor said. “The higher the interest rate, the higher the payment, the more risk tolerance people will be willing to take from a nonQM type loan, and the expansion of these mortgage products into different areas.”
According to Taylor, inventory may affect the purchase loan market especially since “the refinance market has dropped off significantly and the purchase market is much more of a focus for all lenders.” In such a case, lenders who invest in technology and streamline operations are likely to see the best opportunities come their way in 2019.
“The biggest trends for me are how all lenders, whether they’re a bank or an independent mortgage lender, are having to actually successfully utilize technology in order to strengthen their reach to the customer base,” Taylor said. “It’s not as simple as going ahead and buying technology and implementing it, but implementing it correctly and making sure that the people and technology work together to be able to reach their intended customer base and provide a much more dynamic customer experience, whether it be to digital solutions, telephone or anyways the borrower wants to interact.”
Clarke concurred, saying that while technology had the potential to improve the overall mortgage process by streamlining many of today’s cumbersome processes, there was a significant demographic of borrowers that still wanted to work intimately with their lender. “Lenders will want to use technology to enhance their relationships with borrowers and help them make smarter mortgage decisions. This will help lenders build stronger, lifelong relationships because after all, technology is not here to replace us, it’s here to complement how we work on a day-to-day basis.”
Despite falling delinquencies, lenders will also be looking closely at this trend as the market takes a pause in 2019. “As a default executive, for me, what will be key in 2019 and beyond in the new world is less macro and more microtrends. The future will require you to identify patterns and behaviors at a much more granular level in order to effectively understand and manage your default,” Whittemore said.
According to Mellman, “No one talks about delinquencies right now because they are at all-time lows and have been experiencing a decline year-over year. But while there’s nothing to worry about in delinquencies yet, I would always want to keep an eye on those as the housing market evolves.”
What Will You Bring to the Table?
At the end though, 2019’s housing market will be one where lenders will be set apart from each other through the additional value they bring with each and every deal—whether it is for homebuyers or owners. “This means providing educational resources for borrowers, having strong partner relationships, and an efficient or nimble operations team,” Clarke said. “Lenders in 2019 will want to think of themselves as teachers and coaches for their borrowers—guiding them through the mortgage process to ensure they’re making the best decision for their given financial situation.”