Borrowing money to buy a home is cheap – mortgage interest rates remain near historic lows with the 30-year fixed-rate mortgage averaging 4.3% in the first six months of this year. While house prices are up, buying a home remains affordable in much of the country and for many it could be a good long-term investment. Even further, in many areas, buying a home is less expensive than renting. Yet, mortgage origination activity is certainly not meeting expectations this year. Are people buying homes or aren't they?
The answer is "yes" with qualifications. You have to peel back the onion to understand the factors impacting mortgage originations so far this year and there are three important things to know.
- The Refinance boom is over: Refinance mortgage originations were down about 60% percent from 2013 to 2014, and we expect them to decline about another 50% from 2014 to 2015. With mortgage rates expected to rise gradually in the coming months, the incentive for borrowers to refinance will decline and new purchase mortgage originations are unlikely to replace the refinance activity of recent years.
- Home Sales are Off: Sales of existing and new homes are down 5% during the first six months of 2014 compared with the first half of 2013. A period of higher mortgage rates, a harsh winter, and slower economic growth compared to a year earlier contributed to the slowdown.
- Cash Sales are up: People are buying homes, but the number of people who take out a mortgage to purchase them is down compared to last year. All-cash sales of homes in the first six months of this year are up slightly from 31% to 33% according to the National Association of Realtors. However, with rising home values and fewer distressed (REO, foreclosures) homes coming the market, expect the available inventory for all-cash buyers to trend down in the coming year.
What will drive improved mortgage origination activity? Sustained economic growth and jobs. The second quarter economic growth of 4% was welcome news after the first quarter’s 2.1% decline. But we need growth in the last two quarters of the year at a better pace than the first half to reach a forecasted annual rate of about 2% - 2.5%.
On the employment front, job gains through July of this year – averaging 230,000 new jobs per month – are also welcome news. However, there still is underlying weakness in the labor market. During the Great Recession, the labor market lost 8.8 million jobs – 78% of them "good paying jobs" according to the National Employment Law Project. At this point during the recovery, good paying jobs only account for 56% of job gains (26% mid-wage jobs and 30% higher-wage jobs). Meanwhile lower paying jobs, which accounted for 22% of job losses during the downturn, have accounted for 44% of job gains.
Overall, recent economic and employment improvements should help bolster household formations and contribute to gains in construction, home sales – and also mortgage originations. However, even with these improvements, expect new and refinance mortgage origination volume for this year to be the lowest since 2000 at about $1.15 trillion.
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