2012 Housing and Home Financing: 

At a Crossroads

Net jobs may be up, but low-paying jobs still constitute a majority of the new jobs being added. Per capita income has risen; however, a disproportional share of the income is captured by the top 10% of households, so incomes for the remaining 90% will likely remain in stagnation or continue to slide.

The inability of the shrinking number of working middle and upper-middle class households to finance the purchase of a modest-to-upper priced home -- despite a huge overhang of for-sale homes in that price range, the constant presence of the shadow inventory and an climbing Housing Affordability Index (HAI) -- presents a massive roadblock to hopes for even a moderate housing recovery.

Millions of heads of households still wake up wondering and worrying how their jobs, their incomes, their debt situations, etc. will hold up in the next month or for the next year. Consumer spending has grown, but consumers have again been taking on more debt just to help finance basic spending.

These circumstances are not likely to change overnight; neither will home buying quickly rebound.

Government-backed, rate only-refinance programs have been undergoing heavy public debate. Conceptually, they have the potential to keep the current high rate of refinance activity going and/or possibly increase it. By expanding the number of eligible refinancing homeowners, removing barriers to qualification, reducing monthly mortgage payments and increasing spendable incomes, the belief is that consumer confidence will increase, followed by a rise in consumer spending and ultimately, more new jobs.

Although these programs have the potential to improve the housing outlook over the long-run, at this point the near-term impact of a new refinance program on economic growth, household debt reduction and home purchase financing is uncertain and highly debatable, except for the fact that they're sure to generate a burst of fee revenue for mortgage lenders.

After considering how all of these possible factors might unfold, we decided to make only minimal changes to the 2012 FORMAL Mortgage Volume Forecasts that we issued the first week of November. Conditions for home financing, especially purchases, haven't really changed.

A turning point for purchase mortgages? 

2011: Our current estimate is that 2011 EOY total purchase dollar volume limped home struggling to reach a weak $410-$425 Billion range. Due to exceptionally low mortgage rates, it's more than likely that the 2011 refinance volume passed the mid-$500 billion range. Therefore, we expect that 2011 combined mortgage volume will have reached $1.1 trillion or slightly higher.

2012: We believe that 2012 purchase mortgage lending volumes will decrease slightly from 2011 levels. Purchase loan units will be dead even year-over-year, while purchase dollars will fall slightly by 1.6% due to an expected slight drop in average loan sizes. 2012 purchase dollar volume will struggle to reach $406 billion by the end of the year.

In spite of such feeble national purchase numbers, all is not lost.

Viewed from other angles and perspectives, we believe that 2012 will bring us to the bottom of the single-family purchase mortgage volume collapse. Tell-tale signals of local markets starting to revert back to a new trend path are apparent. The deceleration in falling purchase activity, from the rapid plunge that started in 2008 to the moderately negative slide between 2010 and 2011, indicates that a slight turn upward in purchase volume may be imminent in by early next year (2013).

Also on the bright side, purchase volumes in many local communities and household segments have been slowly stabilizing and silently growing communities somewhere inside almost all metro housing markets--often defying conventional real-estate and lending wisdom regarding which markets are considered good bets and which are considered bad ones.

There are many solid, but often underserved and overlooked homebuyer markets where potentially high loan demand levels and future growth velocities are just starting to generate more home financing opportunities.

Lenders who are able to recognize where the greatest home financing opportunities are likely to be concentrated, get their origination resources focused in the most crucial areas and adjust their lending strategies to the unique profiles and needs of those communities will find that 2012 presents a positive environment for achieving their lending objectives, not a negative one. 

Be careful betting big on refinances. 

Based on the refinance and home buying history of the past five years, we would expect refinances to fall by about 35-40% in units and dollars in 2012 compared to 2011, assuming that no new aggressive refinance programs are implemented. But nothing can ever be assumed in refinances.

We doubt that HARP 2.0 will be the driver of a big wave of 2012 refinance demand, as many experts expect. However, if the Federal Reserve gobbles up MBS/Treasuries at the same time that there's an accompanying flight to the safety of U.S. debt due to more Eurozone troubles (recession), mortgage rates could deflate to unheard-of low levels. In that scenario, refinance demand will reign for a short blast until the serial refi-ers are used up. 

Still, there is the very possible scenario that not the even lower rates will translate into a big, long-term wave of re-refinances or a rapid rise in purchase mortgages, given what we've seen in 2011 home financing trends and behaviors.    

These issues are is the basis for our forecast: Housing finance fundamentals are just too fragile to rapidly alter the home financing paths that most local housing markets have been following.

The Three Industry Oracles agree. 

We are not alone in our expectations for 2012 volumes. The Three Oracles of the Industry, in their January 2012 housing finance forecasts, arrived at annual volume projections that are relatively reasonable and appropriate in iEmegent's eyes (for the first time since 2004). 

Unfortunately, their national projections offer loan production people and local market managers very few details about housing transitions, household behaviors, financing needs and the sizes of the lending opportunities in individual local markets.

The Three Oracles' conclusion?  2012 will not be a mortgage banker's cakewalk for purchase volume, but they foresee slightly higher program-generated refinance volumes than projected by iEmergent.

All in, the end of 2011 has set a meager home financing table for 2012. Don't be dismayed, though. There's a better than even chance that the purchase road is probably at its low point and will finally start to turn.

The turn will be frustratingly slow to gain momentum in most communities, yet could be relatively quick to rise in a very fortunate minority of markets. In typical reversion-to-mean fashion, most communities will eventually (and naturally) evolve into new steady and sustainable long-term patterns of housing and home financing growth. That's what dynamic ecosystems tend to do.

Our most fervent hope is that the potential waves of incoming refinancing demand don't blind the mortgage industry to the sustained purchase outreach efforts that are necessary to help restore the households, neighborhoods, communities and cities that have been so profoundly affected by falling home prices, foreclosures, joblessness, deterioration and neglect; communities that only a few years ago were offered the sky.

Lack of buyer-demand is the big bad gorilla in the mortgage house.

According to our estimates, forty percent (40%) of total U.S. Households are no longer considered to be part of the available pool of households who might be able to finance the purchase of a home in 2012, which is an all-time low percentage.

The available pool of U.S. households who are qualified, able, ready and willing to finance the purchase or refinance of a home is at the same level as it was in 1993-95 -- not just in terms of a percent, but in the actual number of available households.

In an article in the December issue of Mortgage Banking Magazine, we outlined why the total sizes of the available U.S. household pools have shrunk so dramatically and why we aren't likely to see a big leap of fortune for struggling households any time soon.

["Qualified borrowers are another rare breed in today's real estate markets. Dennis Hedlund, founder of iEmergent, Des Moines, writes in his story "Everyone Out of the Pool!" how the number of motivated and financially qualified borrowers has shrunk dramatically. He isolates a few selected counties to illustrate how the pools of qualified buyers have been cut in half -- or worse." - Janet Reilley Hewitt, Editor-in-Chief, Mortgage Banking Magazine]

Without a miraculous upsurge in the sizes of the available household pools and with the banking industry continuing to do more self-inflicted damage to its reputation in the very distrustful eyes of consumers, the home financing industry will have to deal with the mortgage lending demand trap for yet another year.

Hopefully by 2013, the demand trap will have started to lose its grip. When it happens, the "penned-up demand" can begin to turn into "pent-up demand" and finally become the "sustainable demand" it needs to be.