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 2012 Q2 U.S Housing Finance
Re-forecast: More Down Than Up
Headlines keep telling us of an economy in recovery -- moderate but steady GDP growth, big earnings gains by bigger-than-big corporations, falling unemployment rates, all accompanied by Wall Street gains, minus some minor ups and downs.
Yet, the US housing purchase market seems unable to climb out of depression. Put aside all of the positive hype about recovery.
For U.S. housing and home lending, future home purchase potential is seriously weak.
Whether we want to believe it or not, the home finance market bears all the hallmarks of a depression- "sustained, long-term downturn in activity." A substantial and sustained "shortfall in the ability of consumers to purchase goods for long periods of time." In purchase lending, loan and dollar volumes flounder as owner-occupied buyers dry up and potential sellers stay put. Credit is limited, incomes are deflating and prices are.....etc., etc. We all know the challenges.
Say what you want about excess for-sale inventories, low home prices and low, low mortgage rates, there's a massive roadblock to hopes for even a moderately improved housing recovery this year: the continued inability of many low, moderate, middle and upper-middle class working households to qualify and finance the purchase of a home. The majority of U.S. households are still short of the wealth, earnings, savings, credit and jobs they need in order to buy a home.
Owner occupied home purchase activity is a primary indicator of the true health and dynamism of households, housing markets and communities. Since 2005 total U.S. owner-occupied purchase mortgage volume in units and dollars has fallen for six straight years. Our current 2012 forecast will make it seven straight years of decline.
The bottom of a cycle is always a weak and precarious place. Any new economic shock--whether it be a Eurozone downturn (or euro breakup), a growing Global recession, another debt-ceiling insanity, more political dysfunction, or stalled job growth--could
quickly send the U.S. economy into recession again, further depressing chances for recovery in the housing and home lending industries.
We believe that it could easily take another six years before the rate at which U.S. households generate purchase mortgage demand returns to long-term, pre-boom trends. If that's not depression, what is?
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U.S. 2012 Purchase Volume: No Strength in the Trends
Many industry experts and enthusiasts try to religiously paint a positive picture of current and future lending activity -- using headlines packed with upbeat words like "surge, leap, climb, vault, jump, rebound" whenever this month's or this week's numbers turn positive compared to previous weeks/months. Whenever the numbers turn south, then slightly positive-sounding images like "slip, slide, fade, ebb, taper" become de rigueur.
The truth is that a metric like the MBA's continuously tracked Purchase Application Index has been fluctuating at very low levels for two years and essentially moving sideways like it's still 1995. Any positive trends have been the crawling type, not leaping.
 | | Base graph from of Calculated Risk. Go to www.calculatedriskblog.com for full inventory of insightful visuals/opinions on housing and economic conditions |
Signs of sustainable growth in home purchase lending opportunities are few and far between. The acceleration that would be needed in the second half of 2012 to offset such a weak estimated first half of about $185 billion in purchase fundings is becoming ever more remote on a daily basis.
GDP and Wall Street aside, we see no reason to significantly adjust our 2012 purchase mortgage lending unit and dollar volume projections upward from our Q1 forecast or even last year's October forecasts. Experts don't want to recognize it, but the country is caught in the clutches of a pernicious home purchase demand trap.
Look for purchase financing activity to reach the low 2011 levels, which means a seventh straight year of decline for housing and home purchases. We project that year-over-year purchase loan units will fall 5% and total mortgage dollars will fall by 3.2% after the dust clears.
Owner occupied purchase financing will account for about 92% of all purchase lending, but will still fall short of $400 billion. An historically low portion of non-owner occupied loans will help make it go over the $400 billion threshold.
Total 2012 purchase dollar volume (owner occupied + non-owner occupied) will be fortunate to reach $415 billion by year's end. To put this into context, the last year in which purchase dollar volume was lower than 2011, and now 2012, was in 1991, a year in which there were also close to 20 million fewer households than there are today.
The rate at which U.S. household markets are generating purchase mortgages remains very weak.
The rate at which U.S. households generate purchase mortgages (PMGR) has been falling unabated since 2006 and is far below the historical trend. We're close to the bottom point in a typical boom and bust cycle, but it's at the bottom where forces for recovery are weak, unstable and uncertain. Any type of new shock, be it small or moderate, internal or external, economic or political, can easily send an entire economic sector downward again.
Homeownership levels to continue to fall.
In parallel with abysmally low home buyer activity, the "real" U.S. homeownership rate is much lower than the official rate currently calculated by the Census Bureau. A big unresolved inventory of "shadow homeowners" who are facing serious delinquency or foreclosure remains. Even if they're occupying their home at the present time, they will likely become non-homeowners in 2012 or 2013. Although they're counted as homeowners today, they portend of a persistent, long-term fall in the U.S. homeownership rate.
A recent report by RealtyTrac projects that U.S. foreclosure volumes will be on the increase. The rising number of shadow homeowners means future homeownership levels will continue to be under siege.
All in, the available pool of home buying households who are qualified, able, willing and ready to finance the purchase of a home will remain very constrained throughout 2012. Hopefully, we'll see a bit more expansion in those home buying pools going into 2013, but lenders shouldn't be betting the farm on the upside when executing on their 2012 plans or developing their 2013 strategies.
2012 Refinance Volume: Strong Refinance Isn't Recovery
Refinances have defined and driven the business of home lending for for four years now. 2012 is clearly yet another refinance transaction volume and fee bonanza for mortgage lenders.
Successive waves of heavy refinance demand consistently fall in amplitude and get shorter in duration over time. The "surge" of refinances and re-refinances experienced so far during the current quarter might dissipate in Q3 faster than anyone thinks. HARP 2.0 is the driver that has altered historical refinance dynamics in the short term. If mortgage interest rates start to slowly rise, the friction will dampen the amplitude and shorten the duration of the wave.
Then again, if the Eurozone recession accelerates downward and the flight to the safety of U.S. Treasury Bonds gains speed or if the TWIST strategy works as described to lower long-term rates or if the Eurozone triggers a global stall or a U.S. downturn causes the Federal Reserve to initiate QE3 and goes back to buying 10-year Treasuries or MBS to stave off a slide to recession, the refinance fee(ding) frenzy could extend the duration of the wave and save the day for many lenders.
Then again, there's a chance that HARP will only alter the refinance dynamics of homeowners for a limited period. A stall and/or a recession will wreak new havoc on households and they'll pull back.
Even though, we've increased our 2012 total refinance projections from earlier in the year, we believe the industry should be very cautious. We do not envision a sustained explosion of refinance volumes to continue unabated.
The heaviest HARP 2.0 refinance volumes will be concentrated in the "sun and sand" states - CA, NV, FL - where the number of underwater mortgages are the greatest. In many other states, refinance activity will be modest-to-flat-to-slightly lower when compared to 2011 refinances. Obviously, when viewed at the MSA/CBSA, county and local community levels, refinance activity will vary widely.
For many mid-sized or regional lenders and servicers, the competitive refinancing potential in their footprints might not equate to big lending opportunities. Over 60% of homeowners with mortgages are serviced (and controlled) by five big lenders. The bulk of the rest are serviced by five more. Depending on how the HARP 2.0 rules and the incentive payments play out, the big servicers have an overwhelming advantage in refinancing their own portfolios of eligible borrowers.
Dynamics of future homeowner refinancing pools and waves.
On the one hand, if Europe falls into severe recession and the U.S. economy stalls, 30-year mortgage rates will likely fall as a result of investor flight-to-safety or due to active intervention (i.e. Twist, Treasury bond purchases, MBS purchases). Lower rates might trigger another round of serial refinancing, but the potential for a stalled economy will have a big negative impact on 80% or more of U.S. households.
On the other hand, if Europe stabilizes and the U.S. economy crawls forward (i.e. at a ponderous 2.2% growth rate), 30-year mortgage rates will slowly rise. Rising rates will choke off the serial refinancers of the past three years. An improving economy would help the struggling 80% of households repair their balance sheets. But then, rising rates coupled with lingering credit issues would thwart many homeowners from refinancing.
In either scenario, the available homeowner refinance pools would shrink and there's a good chance that 2012 refinancing waves will dissipate during the second half of this tumultuous refinance year.
Three Industry Oracles
For the first time in eight years, we're not alone in the forecasting wilderness of U.S. mortgage finance volumes. The Three Oracles of the Industry, in their June housing finance forecasts, have finally arrived at annual purchase volume projections that are relatively reasonable but slightly more optimistic than ours. However, we believe their full-year refinance projections are overly optimistic.
**Note**: The turbulence and diversity of lending that is occurring beneath the surface of the national scene; local communities where lenders should truly be focused, are not addressed by the Oracles. Detailed pictures are hard to paint with big brushes. Their high-level forecasts function as national summaries of the housing finance sector primarily for industry executives, investors, government functions and political players.
In contrast, iEmergent applies its unique bottom-up, demand-based forecasting model starting at census tracts; their ever-changing household profiles and their constantly shifting demand trends. This approach allows us to evaluate the impact of macro forces on local conditions and behaviors. At the same time we aggregate our local projections into state, region and national composite pictures that respect local community differences.
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