What's normal about a $2 trillion market?John M. Robbins Jr.homeownership, residential real estate market, increase wealth
Home: more than just a destination at the end of the day. The
true meaning of the American dream has significance for every
individual who has purchased a house. I still remember the day my
wife and I stepped through the doorway of our first home. We were
excited and nervous. A sense of pride made us feel that we had
truly made it. As homeowners, we felt that we could raise a family
in a stable environment. Our home also represented opportunity we
were investing in our future and that of our children.
Each year, many Americans fulfill their dream of homeownership.
The purchase of this tangible asset evokes various intangibles
emotions that make the housing industry one of the pillars of our
nation. Woven into the moral fiber of this country are communities
of homeowners who seek the same ideals: family, friendship, safety
and freedom.
More than ever before, people are regarding their homes as a
measure of financial security. With a depressed stock market,
rising gasoline and energy prices, and the threat of inflation,
many consumers take comfort in the fact that their homes are
appreciating faster than their mutual funds. After all, homebuyers
have provided the most support to U.S. economic growth. According
to the Mortgage Bankers
Association, residential investment has "increased nine percent
in constant dollars during the past four quarters, and housing
starts are at levels not seen since the middle years of the 1970s,
when rates of household formation were boosted by baby boomers
reaching home-buying age."
Referred to as the "new gold," Americans have turned to
residential real estate to increase their wealth. While it is true
that home investments can be just as susceptible to market forces
as stocks, the value of homeownership has been steadily increasing
with no foreseeable plummet in prices. According to the National Association of Realtors
(NAR), based in Washington, D.C., there has not been a
nationwide decline in home values since the Great Depression.
And the rate of homeownership is also on the rise. The U.S. Census Bureau reports that
rental vacancy rates are at the highest level in 40 years. Many of
those who do not own homes see the opportunity to improve their
financial situation, but they need someone to open the door to
ownership. Center Pieces Working Families with Children: A
Closer Look at Homeownership Trends, a study conducted by the
Washington, D.C.-based Center for Housing
Policy (the research affiliate of the National Housing Conference) in May,
shines the light on this desire. The study finds that low- and
moderate-income working families with children defined as
households earning less than 120 percent of the local median income
but more than the equivalent minimum wage have the most difficult
time becoming homeowners.
These families often consist of people who provide vital
services to our communities, such as police officers, firefighters
and teachers. Of greater concern are the findings from the Center
for Housing Policy's report that show "children who live in
owner-occupied housing are more likely to do well in school and are
less likely to have behavioral problems." The lag in homeownership
can be attributed to more single-parent households, the rising cost
of homes and the gap between the increase in minimum wage and cost
of owning a home beyond the mortgage payment, including utilities,
homeowners' insurance and property taxes.
This brings me to our present market. Industry experts keep
referring to it as a "normal" purchase environment. What they do
not do is define what this means. Some economists and housing
analysts foresee the housing bubble bursting and act like no more
houses will ever be built or sold. While cycles in the mortgage
market are nothing new, everything has changed.
Today's purchase market is in a constant state of re-calibration
and consists of new families, unique demographics and different
expectations. Is the sky really falling, as some in the media
claim? Absolutely not. NAR estimates that some 12 million new
households will have formed in the United States between 2000 and
2010. Talk about opportunity.
Here's why I say there is nothing "normal" about the current
"normal" purchase environment. First, the size of the mortgage
market is still predicted to be substantial, but it will have a
different balance. I predict that by the end of 2004, 75-85 percent
of transactions will be home purchases instead of refinances. Given
rising rates, there will be consolidation throughout the industry.
We expect that the ranks of mortgage brokers will be thinned by
approximately 30 percent from the 50,000 or more brokers that were
doing business during the refinance boom. The number of traditional
loan officers will also decline by approximately 25 percent, given
the new dynamics of the market.
Looking ahead, I envision a future that is even brighter than
the last three record-breaking years. In fact, MBA projects $2.4
trillion in originations for 2004, which is still one of the
largest markets in history. Joel Rassman, chief financial officer
of Huntingdon Valley, Pa.-based Toll Brothers Inc., the
biggest U.S. builder of luxury homes, made an excellent point for
the skeptics out there. He said, "A better economy will create more
jobs and consumer confidence and generally create more income, and
those will offset effects of higher mortgage rates." David Berson,
chief economist at Fannie
Mae, predicts that home sales will stay very strong through the
middle of summer.
NAR chief economist David Lereah confirmed a belief in a robust
housing market by indicating that the typical family could afford
to buy a home costing more than 4.5 times its annual income. And,
on a national basis, homebuyers have paid just more than 3.1 times
their income, so they are far from overextending themselves. That
means home buying will most likely continue at a rapid pace. In
fact, by 2010, I see a mortgage market that will grow to $14-$16
trillion in size.
This prediction is due, in part, to the second characteristic of
the "new" purchase market. That is, there are unique demographics
that have created entirely new niche opportunities. Younger
peoplethose in their 20s and 30sare entering the housing market at
an earlier age. This segment of the population used to be renters,
but they are realizing the value of investing in their futures now,
perhaps even before they start families or marry. Baby boomers are
not only trading up, but they are also buying vacation homes or
rental properties. Record numbers of immigrants are now calling
America home and are becoming first-time homebuyers. A number of
geographic markets especially those in Middle America have a large
inventory of modestly priced homes as well as considerable land
that can be used for new developments. People who want to buy homes
are picking up and moving to these areas to live the American
dream.
Third, there are more loan products available that help offset
rising interest rates. In this "normal" purchase market,
plain-vanilla loans may not be the right choice. Today, homebuyers
want options. As mortgage lenders, it serves us well to develop
nontraditional products that meet a diverse array of consumer
needs. The popularity of five- and seven-year adjustable loans will
continue to grow. Homebuyers are asking for other types of
adjustable-rate mortgages (ARMs) to manage affordability. In May,
ARMs accounted for 35.2 percent of all mortgage applications,
according to MBA. Douglas Duncan, MBA's chief economist, points out
that this type of loan product garnered a larger share of the
market in proportion to the rise in long-term interest rates. As
consumers have become savvier, they are eager to find the lowest
monthly mortgage payment possible.
There is also an increase in interest-only loans, which carry no
principal payment and no equity build-up. The lower amount makes
qualifying for these loans easier, especially in the sub-prime
area. Another product, negative amortization loans, also uses
limited equity build-up to initially limit price shock. There are
also more state and local programs as well as low down payment
loans available that target entry-level buyers. There are some
mortgage banking companies that are even allowing consumers to skip
a loan payment in the case of job loss.
Sub-prime lending has come into the sunlight. There is no longer
a stigma attached to this market. The large players in the industry
are primarily responsible for this evolution. They have used this
alternative to help put people into houses who may not have
qualified before. A recent survey that our company completed with
our 5,000 mortgage broker customers indicated that 77 percent of
them are involved in sub-prime lending. Despite the increase in
sub-prime lending, foreclosure rates have not risen dramatically.
This is due, in large part, to the fact that homeowners have
substantial equity in their homes.
Unfortunately, recently adopted state predatory lending laws
have hurt more people within the sub-prime arena than they have
helped. Federal exemption to this patchwork of laws is really the
only answer for the small- and medium-sized, non-bank-affiliated
mortgage banks. Being audited by multiple jurisdictions is just not
acceptable it isn't good business practice for anyone.
In the mortgage industry, the best is yet to come. If there was
any doubt, just read the Washington, D.C.based Homeownership
Alliance's May study titled America's Home Forecast: The
Next Decade for Housing and Mortgage Finance. This seminal
work, written by some of the leading economists in our industry
including NAR's Lereah; Fannie Mae's Berson; Frank
Nothaft, chief economist at Freddie Mac; Paul Merski,
chief economist at the Independent
Community Bankers of America (ICBA), Washington, D.C.; and
David Seiders, chief economist at the National Association of Home Builders
(NAHB), Washington, D.C. is rich with facts and figures
supporting steady growth in homeownership.
The "new" purchase market provides a wide range of possibilities
for increased loan volume, greater market share and enhanced
profitability. In order to serve these prospective buyers, we must
understand who they are and pinpoint their needs. As mortgage
bankers, we hold the key to opportunity for millions of people who
share the same ideals and desires we do as homeowners. America is a
country that treasures freedom. It just makes good sense to open
the door and keep the dream of homeownership alive for decades to
come.
Reprinted with permission from Mortgage Banking
magazine (July 2004, pp. 1516), published by the Mortgage Bankers Association. John
M. Robbins Jr. is chairman and chief executive officer of AmNet Mortgage Inc.
(formerly American Residential Investment Trust) and American Mortgage Network,
headquartered in San Diego. For more information, visit www.amerreit.com.
