April 2, 2013

 2013 Housing Finance Forecast: 

 Purchase Up a Little; Refinance Down a Lot 

The first quarter of the calendar year is closed. The mortgage lending year is almost locked-in through May. Looking back at the previous four quarters, a broad 2013 recovery in homebuyer financing is a tenuous hypothesis at best and recurring waves of refinances are diminishing in frequency, amplitude and duration. 

A "happy-days-of-housing-recovery" song has been on the airways, mediaways, and blogways for a year now. The song remains in Billboard's Top 40 (i.e. upticks in housing prices, housing starts, new home sales and existing sales, etc.), but an accompanying recovery in home mortgage purchase financing has been missing from the charts since the short-lived First Time Home Buyer Tax Credit played out three years ago.   

2013 home purchase financing will be languid at best. We project 2013 purchase mortgage dollar volume will end the year higher than 2012's total volume, but not by much.   

Further adding to mortgage bankers' anxiety, we expect 2013 home refinancing activity to follow a declining path; falling 25%-30%  below 2012 in total dollar volume.

Purchase lending has shown some positive movement lately but is still struggling to gain traction in most communities. As always, home refinancing follows the interest-rate winds, but has been relying very heavily on HARP expansion for the past two years. Homebuyer demand and positive housing turnover (excluding foreclosure sales, REOs, investors, all-cash sales and other distressed property turnover) have not yet returned to past household and homeownership behaviors. 

For a large majority of American housing communities, "vibrancy" is not a word in their collective vocabularies. 

U.S. householders' beliefs in the cultural values of homeownership and their honest intentions to buy and own a home in the future (see Fannie Mae February U.S. Housing Survey) are heartening, but they've never been predictive of pent-up demand, nor harbingers of an impending purchase lending recovery next year, the year after, or at any particular point in the future. 

Heavy refinance activity in 2012 has had very little impact on purchase lending activities. If refinancing activity continues at a 2012 pace, lenders will continue to enjoy the gift of windfall profits again this year. 

There'll be a price to pay forward, though. Another year of ultra-low rates, heavy refinance promotion, another expansion of HARP and more re-refinancing could significantly suppress future home buyer and home refinance demand when mortgage rates eventually rise to the 4%-5%+ range. In addition, the Eurozone recession could worsen and drag other economies downward with it. Even a moderate shock could slow the U.S. economy again, causing the shaky weebles of the financial system to lose what footing they have and start to wobble. 

U.S. Housing Price Dynamics

The FHFA reported a +5.6% year-over-year change in the national HPI (Jan 2012-Jan 2013). S&P Case-Shiller housing price data shows a similar national gain. Beneath the surface, though, the FHFA's 5.6% gain was dominated by home sales and housing price changes in seven dominant states -- CA, AZ, NV, UT, CO, FL and MI. Not surprisingly, those same seven states have experienced the most exuberant booms, biggest busts, worst home value declines and distressed home sales in the U.S.  

Figure 1.

HPIs in the remaining 43 states and D.C. have been either slightly rising, flat or declining over the past four quarters (Figure 1 - FHFA map on right shows flat to declining states in red/orange). To say that U.S housing is firmly in a sustained recovery is a big stretch. The list of local housing markets that have shown respectable housing price gains, yet still remain 20%-30% or more down from where their home values peaked in 2005-2006, is quite long.

Recovery hasn't been resonating with consumers. They don't appear to be convinced. Wary households are skeptical of "now's a good time to buy" and downright negative about "now's a good time to sell." Mostly, they've been staying home and standing pat; working, looking for work, waiting, saving (if they can) and hoping that their personal financial situations somehow improve.  

2013 Housing Finance Loan Units & Dollar Volume Projections

Total 2013 purchase money lending of $505 Billion is a relatively subdued volume and will be very slow to gain momentum. Purchase demand is still inherently weak, unstable, and highly vulnerable to future shocks and setbacks, even small ones.

When viewed through the lens of 2008-2011, though, $505 Billion in total U.S. purchase volume is a positive sign! 

We expect owner occupied purchase volume to increase by almost 4% year-over-year in units and 1.2% in dollars over 2012, depending on how average loan sizes change relative to gains in housing prices. The reason that we believe the growth in dollar volume will be slower than unit volume is that average loan sizes have never closely tracked with housing prices. In the current lending/credit environment we expect down payments to be pushed a bit higher and LTVs flat to declining. 

Non-owner occupied purchase financing will also be slightly down in 2013, while non-owner occupied all-cash sales will remain strong as investors rush to take advantage of low home prices before they gain any more steam.

The current high levels of refinance lending will trend downward over the course of 2013 in a succession of diminishing waves of refinance activity. The refinance dollar volume will land somewhere on a range between a low of $711B and a high of $860B for the year. 

Downside/Upside Forecast Risks

On one hand, agency changes to current GSE refinance rules, proposals in Congress to expand HARP beyond GSE-owned mortgages, and Federal Reserve monetary policies (QE3) will likely fuel a couple more short-lived refinance waves, but of lessening power. Expect total 2013 refinance volume to trend toward the higher end of our forecasted refinance-range -- maybe reaching $900 billion. Probabilities seem to be pointing in that direction right now. 

On the other hand, the 2013 impact of QM/QRM, FHA program changes, G-fee hikes, CFPB lending transparency standards, mortgage servicing rules, lender liability exposures, ability-to-pay underwriting, bank capital and reserves issues, and many other regulatory pressures could easily hold back credit availability to consumers and stymie purchases and refinances. Continuing economic and political troubles in the Eurozone might also negatively affect 2013 recovery momentum in the U.S.

All things considered, we believe future homeownership/home buying recovery will play out very slowly over the next four years or so.

Where's the Demand? 

The MBA, Fannie Mae, Freddie Mac and many other mortgage industry oracles, most of whom employ forecasting models that are that are primarily driven by the elements of supply and finance, see a more generous picture for 2013 than we do, in both their purchase and refinance dollar-volume projections.

In contrast to most other oracles, our forecast models are primarily driven by the elements of demand -- homeownership demand to be exact -- the past, present and future home buying and home financing behaviors of U.S. households.

The vast majority of current and future U.S. households have not and are not recovered from the Great Recession/Lesser Depression.

Depression-like conditions of high debt loads, stagnant-to-falling household incomes and employment worries continue to plague the everyday lives of the vast majority of U.S. households.

We expect that approximately sixty-four percent (64% - $295 Billion) of the total projected 2013 purchase dollar volume will be generated by the Low, Moderate, Middle, and lower half of the Upper Income groups combined; the household groups that have most negatively impacted by the recession.  

The $295B-64% share is just slightly above their combined share in 2012 but flat in volume. The big risk to 2013 purchase volume demand is that households in all four of these income groups are highly vulnerable to even the slightest economic shock or employment/wage crisis. 

Maybe by 2015.