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Will a Solid 2015 Follow a Shaky 2014?

Phil Hall
Dec 17, 2014

With two weeks to go until the end of this year, the mortgage world is being shaped with a mix of encouraging and disappointing news. However, two new forecasts predict a better tomorrow for the industry after the New Year rolls in.

In terms of good news, it appears that the negative equity crisis in quickly on its way into the history books. The latest data from Zillow finds the number of U.S. homeowners with underwater mortgages has fallen by more than 40 percent since early 2012. Zillow reported that the negative equity rate fell to 16.9 percent of all homeowners with a mortgage in the third quarter, down from 21 percent in the third quarter of 2013, and the company expects it to fall to 15.2 percent by the end of the third quarter of 2015.

Zillow also determined that homeowners with less expensive properties were more likely to be underwater in the third quarter than owners of more expensive homes. In some of the more extreme examples, Zillow found that 49.2 percent of Detroit homes valued in the bottom price tier were underwater, while just 7.6 percent of the area's highest-priced homes were upside down, while 41.4 percent of bottom-tier Chicago homes were in negative equity, compared to 23.9 percent of middle-tier homes and 10.4 percent of top-tier homes. Nationwide, 27.4 percent of bottom-tier homes were in negative equity in the third quarter, compared to 15.7 percent of middle-tier homes and 9.3 percent of top-tier homes.

“The market has made terrific strides since bottoming out in late 2011 and early 2012, with millions of underwater homeowners freed in just the past few years, and millions more set to surface in coming months and years,” said Zillow Chief Economist Dr. Stan Humphries. “Looking at negative equity helps us understand so many of the currently out-of-whack dynamics in the housing market, including low inventory, rapid home value appreciation and weak sales volumes.”

While fewer homeowners are now experiencing underwater mortgages, it also appears that fewer people are seeking to buy homes. The Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending December 12 found the Market Composite Index, a measure of mortgage loan application volume, decreased 3.3 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the index decreased four percent compared with the previous week.

The MBA also found that its seasonally adjusted Purchase Index decreased seven percent from one week earlier, while the unadjusted Purchase Index decreased 10 percent compared with the previous week and was five percent lower than the same week one year ago. The Refinance Index remained unchanged from the previous week, while the refinance share of mortgage activity increased to 66 percent of total applications, the highest level since December 2013, from 64 percent the previous week.

Mike Fratantoni, MBA’s chief economist, expressed surprise over these developments, though he emphasized the more positive aspects of the latest application data.

“Amid plummeting oil prices and heightened concerns regarding global economic growth, interest rates dropped sharply through the course of the week, with longer-term Treasury yields falling more than 10 basis points,” Fratantoni said. “The average mortgage rate also dropped during the week, with several lenders offering 30-year fixed-rate loans with rates below four percent. The 30-year conforming rate was at its lowest level since May 2013, and the 30-year jumbo rate averaged 3.99 percent for the week. Surprisingly, given this large drop in rates, applications for conventional refinance mortgages did not increase last week, but there was a notable pickup in government refinance applications, which were up 11 percent for the week, led by an almost 16 percent increase in VA refinance applications.”

Still, optimism in regard to housing has not abated. Indeed, the 2015 forecast issued by HSH.com predicted a robust new year for the market.

“Home sales have been more or less steadily moving to a higher pace throughout 2014,” said Keith Gumbinger, primary researcher and writer for HSH.com's MarketTrends newsletter. “The annual rate of existing home sales has climbed over five million during the past five months, and is generally in an upward pattern. Sales of new homes have been more erratic this year, but the last few months point to a solidifying sales picture, and optimistic builder outlooks suggest a continuation of this trend in 2015. Given available information, it would seem that about a total of 4.5 million new and existing homes were sold in 2014; with still favorable mortgage rates in place, a slightly wider credit box and other factors, it seems reasonable to us to expect perhaps a seven percent rise in total sales next year, leaving us at about 4.8 million or so total home sales for the year.”

Gumbinger also forecast a strong year ahead for the home equity market.

“Equity usage remains low compared to the boom years of the mid-2000s, so there remains plenty of upside for growth, and it wouldn't be a surprise to see another double-digit increase for 2015,” said Gumbinger.

Gumbinger’s optimism on the state of housing was shared in WalletHub’s 2015 economic forecast.

“Real estate has lagged behind the rest of the economy as we recover from the Great Recession, perhaps because consumers are scared to make the same housing mistakes once again,” said John S. Kiernan, senior writer and editor at Evolution Finance and author of WalletHub’s 2015 economic predictions. “But with the economy clearly stabilizing, interest rates remaining low, lending guidelines being relaxed and Millennials coming of home buying age, it’s fair to expect sales to rebound in 2015.”

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