It’s A Cool, Cool Summer

There’s little but good data across the mortgage climate.

David Luna
A Mortgage Professional sits half business half swim attire.

The news has been nothing but full of how hot this summer’s been. But they’re only looking at temperatures. When you look at the mortgage industry, what you see is that so far it’s been a cool, cool summer.

After the year we have all been through, we are ready for some positive news. The question is, when are we fully moving from the refi boom to a purchase boom. This will happen. Let me be clearer, this WILL HAPPEN in short order. Housing starts for March were at an approximate annual rate of 1.7 million units which is 37 percent above the March 2020 rate according to HUD. The economy will continue to recover, rates will go lower, and the inventory issue will be resolved. It is going to be a promising next couple months which is going to lead into an even better fall … here is why.

Inventory

Demand is gone from warm to scorching hot across the country. Having a home with 5, 10 or even 15 offers above the asking price is now the new norm. Competition has become fierce, with thousands of borrowers wondering if they are going to land a home or not. My prediction is they will. Builders are incredibly positive on what they do best … BUILDING. The National Association of Home Builders’ Housing Market Index sentiment numbers show an overwhelming positive outlook. 

My father was a builder and I worked with him for years. In Southern California where I was raised, my dad encouraged me to consider purchasing a new home.  These houses started around an astronomical amount of money for me at the time, $59,000. The median home price in that same area of Westlake Village today is $1.3 million. Just how I missed out, there is a feeling from borrowers that they will miss out. Let me tell you, that is not the case for most buyers.  

More new homes need to be built and the rate of building is just going to continue to increase. Remember the half-finished subdivisions from 2007-2008? Builders lost a lot, so it has taken a while to build the momentum needed to meet the demand. Trying to make up a twelve-year deficit is not going to be done overnight. The housing starts have already begun trying to play catch up. This momentum will continue for the next couple of years, but things are going to start catching up this summer!

Mortgage Affordability

Interest rates will continue to be at historic lows and in the next couple of months will go even lower.  There has been a knee-jerk reaction to the market which will stabilize over the next few months. Are we really going to see an increase in inventory and rates stabilizing? I passionately believe we are. The reverberating impact occurring on the building and supply chain is significant, but it is temporary. 

If rates are at historical lows, demand is at historic highs, and borrowers are now better qualified, what is the problem? The answer is regulations and the Covid-19 pandemic. A recent study by the National Association of Home Builders found that regulations imposed by all levels of government on new homes account for about $94,000 -- or 24% -- of the cost. Regulations are going to be a factor in the increased cost on homes, and that is only going to continue to grow. 

Luckily, there is help on the way with down payment assistance programs. The Downpayment Toward Equity Act of 2021 is developing as we speak. This is going to be a game changer for first generation home buyers or parents who lost a home to foreclosure and who currently do not own a home. A $25,000 grant, meaning they will not have to pay it back, is gaining more traction in Congress. It also includes those that are considered “socially and economically disadvantaged.” If more homebuyers can qualify with this refundable tax credit by the end of the year, we are going to be looking solid once inventory catches up. 

Coronavirus

Covid: The elephant that has been in the room for the past year. The pandemic has clearly impacted the very fabric of our society. It is reached our wonderful industry and affected a wide range of aspects. 

Do this for me, go down to your local building supply store and check what the cost is for a sheet of plywood. Be prepared to pay over 7x the cost from just a few months ago! The cost of lumber has increased 300% since April 2020, according to National Association of Home Builders estimates. Framing lumber has hit an all-time high of $1,300 per thousand board feet. Building new homes and renovating existing homes are now costing much more. The impact has been most noticeable in the transportation of delivering the materials, building supplies including cabinets, the construction services industry and home upgrades such as appliances. Covid has caused major delays, unemployment, and limited quantities of the materials. 

Cruise through your favorite fast-food restaurant and you will find limited quantities on your sauce of choice. No, I am serious: the sauce ratio on some major chains is limiting one sauce per entry and two per meal. Supply chain shortages are springing up across an array of industries. Is there a shortage on the supply of mortgage lending? Absolutely not, but by default the mortgage and housing industries are intertwined. We are feeling the same pandemic related pains and heartaches. 

I have had to ask myself, what have we learned during these trying times? Well personally, I have learned that people still want a home now more than ever. As we begin to open back up and overcome this scourge one vaccine at a time, the mortgage industry is going to become a vital means to help the new normal come back. The phenomenon of homeownership is now in the forefront of the minds of the American people. As suburbs expand and affordable housing locations continue to grow across the country, it gives me a sincere level of optimism that the mortgage industry is going to be better than ever.

The Economy

The economy is doing much, much better. Quarter 1 of 2021 was a breath of fresh air with a 6.4 percent growth rate making it the best quarter of GDP growth since 2003! The biggest part of our economy, personal consumption, surged by an annualized rate of 10.7 percent, the second fastest since the 1960’s. The rush of consumer spending will continue to boost the total output past pre-pandemic levels, in my opinion. At the end of July, the Dow hit an all-time high. People want to get out and spend the money they have saved over the course of the last year. 

Low unemployment causes inflation. I learned this a long time ago. When people have money and want something they will pay more for it. The Federal Open Market Committee (FOMC) meets about eight times per year to discuss economic conditions. This committee determines whether to hike or lower the Fed Fund Rates. Funds rates are still between 0 and 1/4. It is important to note that FOMC does not control or move mortgage rates. It is more about understanding the economic impact and how those elements can influence mortgage rates. The more important part to understand is inflation. 

Is inflation real? Well yes, it is, if we do not solve the Covid-19 crisis or repair the supply chain, then it is going to be a problem. I do not think inflation is going to be a big issue as the economy continues to improve.

No Bust

We are not in a housing bubble. The fear of a similar bubble bursting from what we experienced back in 2007-2008 will not be realized. Here is why: The credit scores, education level, types of job and income of today’s borrowers have been much different than in the past. Foreclosures and forbearance issues are not the same either, because of the equity in the home. Redfin Chief Economist Daryl Fairweather was recently quoted, “Affluent homebuyers from New York and San Francisco have moved to places like Florida and Texas during the pandemic, which has fueled home sales and driven up prices in those areas.” Dr. Lawrence Yun, Chief Economist of the National Association of Realtors agrees. He said, “This is not a bubble. It is simply lack of supply.”

The cool, cool summer we are going through has some “magic.” Dr. Elliot Eisenberg, an international acclaimed economist and public speaker stated, “low rates, low existing supply and a booming stock market can create some magic!” It took more than three years for the GDP to fully recover from our last recession. With these much better contributing factors it is not going to be nearly as long. GDP growth is on track to be the best rate since 1984. 

Home prices across the country have reached an average of $344,625, according to a recent Redfin report. The year 2020 is over, while 2021 is the light at the end of the long dark tunnel we have all needed. Freddie Mac reported net income of $2.8 billion for first quarter 2021, which is a particularly good indicator. Production estimates are another signal that things are improving. The Mortgage Bankers Association of America is estimating $3.3 trillion for 2021. Freddie Mac sees it at $3.5 trillion, while Fannie Mae is estimating over $4 trillion. 

Put on your sunglasses but please, please do not relax. I instruct thousands upon thousands of mortgage professionals every year. I’ve heard the concerns and doubt -- but let me tell you this: this summer is going to continue to be even busier, more exciting and will end up being a really cool, cool summer.

This article was originally published in the NMP Magazine August 2021 issue.
Headshot of David Luna
David Luna

David Luna is a former state banking commissioner in Utah. He is president of Mortgage Educators & Compliance.

Published on
Aug 05, 2021
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