I receive a lot of questions regarding the short-term direction of the markets, as well as the long-term viability of the industry. By now, you should recognize that I am not much for predictions. There are too many uncontrollable factors that can intervene. However, there are some factors that have at least some degree of certainty attached to them. Therefore, this month I will not focus on the markets but will take a broader view.
For all of those who have written regarding why the purchase market has become so “slow” this summer, let’s take a look at the factors we are facing …
►Seasonal: It is not unusual for purchases to fall in July and August. In most areas of the country, the strong sales season is in the spring and there is a secondary rise in the fall after Labor Day as well. August and December are usually the slowest purchase months of the year. December can be a strong closing month, with builders trying to get houses finished and on the books for the year, at least when builders are building.
►The tax credit: We all knew that the end of the tax credit would coincide with a drop in purchases. I am not sure why so many seemed to be surprised at the severity of the decrease. Not only was the incentive removed, but we “borrowed” from future purchases. And don’t forget that the tax credit ended and the summer pause came along shortly afterwards, a double whammy.
►The slow economy: The economy was not roaring in the first quarter, but it was a lot stronger than it was just two years ago. All along, we have said this would be a recovery of “stops and starts.” Well, this summer we had a “stop.” The question is: “Did the economy slow down because of the end of the tax credit or did the real estate market slow down because of the economy?” I don’t really think it matters whether it was the chicken or the egg, because you cannot have one without the other. We proved that when the collapse of the U.S. real estate market fueled a worldwide recession.
►Very low rates: That is an understatement. We had record low rates that should be encouraging sales. I am sure some sales were encouraged by these rates, but obviously not enough to offset the first three factors. Many originators have been living this summer off of refinances and are keeping their fingers crossed that these rates will last until the end of the year. On the other hand, continued extraordinarily low rates could be considered bad news for the economy and purchases.
►Unqualified clients: We should have the largest refi boom in history right now. We don’t because so many clients cannot qualify because of lack of equity, low credit scores and high back ratios (or low incomes). The government (Federal Housing Administration) is adding an “underwater refi program, but 97.75 percent loan-to-value (LTV) requirement and mandatory principal reduction will keep many banks away from this option. Of course, tighter lending standards will also keep the volume in the purchase market down. We really cannot say that this is a “seasonal” phenomenon or will swing back with the economy starts growing. New lending standards, which are actually the ones we had 20 years ago, seem to be set in place for a long time. These standards are necessary for investors to regain their confidence with regard to purchasing mortgage-backed securities (MBS). The government cannot support the secondary markets forever—or can it? We need a healthy secondary market for the long-term viability of the mortgage industry.
Now let’s talk about the factors affecting the long-term.
►Industry viability: If you are wondering whether this industry will be viable in the future, here is one thing I can assure you: People will be buying homes for decades in the future, and more likely for centuries. And they will need to borrow money. I cannot tell you the shape or format of the industry, but I can tell you we will have a mortgage industry.
►The population will grow: Many analysts love to point out that the homeownership rate is shrinking and will probably continue to shrink. I don’t doubt these numbers, nor do I believe that this won’t hurt the industry in the long-run. However, if you look at the long-term demographics, we have a lot to look forward to. And many of those “turned into renters” will want to rent condos and houses instead of apartments. As a matter of fact, some will be renting the houses they lost in foreclosure. This will turn out to be a great opportunity for investors because we are not building enough homes or apartments to meet this demand in the long run.
►The deficits: Yes, eventually we will have to deal with the deficits. The stronger the economic rebound, the less this situation will hurt. However, in the long run, if we have a stronger economy and we are dealing with massive government debt, we will likely see higher rates in the future. But I emphasize again, the higher rates are not likely until the economy improves. And an improving economy will mean more purchases because more will be employed. This will definitely require a balancing act by the Federal Reserve Board.
►Unqualified borrowers: When the housing market rebounds, we will still be left with consumers with low credit scores, high debt ratios and tighter lending standards. We don’t expect the sub-prime boom to resurrect itself in the future.
While these are not all the factors affecting the short and the long term, these are very significant factors that will impact our future. What I am suggesting to the average loan officer is to take a long-term view. This is always the case when I suggest that loan officers focus on purchases rather than solely refinances. It is also the case when I suggest that they have a system in place to help borrowers get qualified in the future, even if it does not mean a deal next week. Yes, the mortgage industry will be here in the future. But the real question is … will you be a part of this industry? The opportunity is there for the taking but you will have to have a long-term view, as well as a short-term view?
Dave Hershman is a leading author for the mortgage industry with eight books and several hundred articles to his credit. He is also head of OriginationPro Mortgage School and a top industry speaker. Dave’s Certified Mortgage Advisor Program can be found at www.webinars.originationpro.com. If you would like to stay ahead of what is happening in the markets, visit ratelink.originationpro.com for a free trial or e-mail
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