Bankers Beware: Already Crumbling Mortgage Market Could Get Worse

A long period of cheap mortgage money came to an abrupt end and the pain is rippling out across banking. Originations have nosedived, would-be homeowners are thwarted by rising prices and rates, and recession fears overshadow everything.
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The mortgage lending business has entered a slump, and no one has more than an educated guess as to its duration and depth.

“Perfect storm” may be a cliché, but it applies here. Consider this confluence of major forces: high inflation, the Federal Reserve aggressively cranking up rates to bring inflation under control, a housing affordability crunch due to record-high (and still rising) home prices. All of which has already slammed home sales and mortgage applications.

Intertwined with it all lies the risk of recession, with the handicapping on that all over the lot. One noted economist predicts a “stagflationary global debt crisis.” Others say we are already in a recession. Talk of the latter was further stoked in late July 2022 when the Gross Domestic Product shrank for the second consecutive quarter.

On the other hand, Fed Chairman Jerome Powell maintains that we’re not in a recession. (More on his views below.)

Maybe he’s right, but JPMorgan Chase — one of the largest home lenders — reported that second quarter mortgage origination volume was down 45% compared to the year before quarter. That’s a drop of $22 billion in lending. Also: “Home lending revenue was down 26% year on year as the rate environment drove both lower production revenue and tighter spreads.”

Bang, Bang Goes the Fed's Hammer:

When the Federal Reserve hiked rates by 0.75% for the second time in a row, that drove one more nail into the housing boom.

Freddie Mac projects that total mortgage originations (purchase and refinancing mortgages) will fall to $2.8 trillion in 2022 and $2.3 trillion in 2023. By comparison, the same metric stood at $4.8 trillion in 2021.

Untasty Stew of Residential Real Estate and Mortgage Numbers

There is almost no good news on the home lending front, not even in related activities that could offer some credit volume substituting for actual mortgages. Here’s a rundown on the many numbers that make up the market picture:

Mortgage applications plummet
They dropped for the fourth consecutive week in late July 2022, hitting the lowest level of applications since February 2000, according to the Mortgage Bankers Association. That’s close to lows last seen at the onset of the pandemic..

“A potential silver lining for the housing market is that stabilizing mortgage rates and increases in for-sale inventory may bring some buyers back to the market during the second half of the year,” MBA stated.

Other statistics make that seem like very wishful thinking….

Home sales keep falling
In late July 2022 sales of existing homes, for which financing would already have been arranged, fell for the fifth straight month in June. The National Association of Realtors reported that sales were down 5.4% from May levels and 14.2% from June 2021.

Also, the inventory of unsold existing homes jumped by 1.26 million in June alone — three months worth of sales at current levels, according to NAR. That inventory is up 9.6% from May and 2.4% from June 2021.

New home sales in June fell below May levels by 8.1% and 17.4% below June 2021 levels, according to a joint report by the Census Bureau and the Department of Housing and Urban Development.

Pending home sales fell by 8.6% in June, compared to May, NAR reported. Compared to June 2021, pending sales contracted by 20%.

Fannie Mae has cut its forecast for total home sales in 2022 to 5.82 million units, which would be a 15.6% decline from 2021 sales.

National digital real estate broker Redfin states in a report that fewer people are searching Google for “homes for sale.” Searches during the week ending July 28 fell 26% from the same period in 2021, though they ticked up a bit over levels in earlier 2022. The firm’s Redfin Homebuyer Demand Index — based on requests for home tours and other home-buying services from Redfin agents — was down 14% in late July versus the year earlier. It’s been laying people off.

Read More: High Rates & Tight Housing Spells Bleak Outlook for Mortgage Lending

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Price Shocks on Two Fronts

Home price increases are breathtaking
Meanwhile, the median price for existing-home sales rose 13.4% over June 2021. That is a new record high, according to NAR.

The association calculated that buying a home in June was up 80% from June 2019. Implication: “Nearly a quarter of buyers who purchased a home three years ago would be unable to do so now because they no longer earn the qualifying income to buy a median-priced home today.”

“U.S. median home prices have been rising year over year for 124 straight months. This is the longest-ever streak, says the National Association of Realtors.

In late July, the S&P Corelogic Case-Shiller home price index for May came out. Home prices rose 19.7% over May 2021, which reflects a slowing over the previous increase by 20.6%. Certain markets that have had migration from California and elsewhere saw much higher increases: Tampa (36.1%), Miami (34%) and Dallas (30.8%) lead the country’s metro areas.

“A more-challenging macroeconomic environment may not support extraordinary home price growth for much longer.”

— S&P Corelogic Case-Shiller

Mortgage rates rising
The Fed’s sharp increases in the Fed funds rate have propelled mortgage rates upward from their long run at or near historic lows.

Freddie Mac projects that the 30-year fixed-rate mortgage will average 5% over 2022. By contrast, in 2021 30-year fixeds averaged 3%. As of late July, rates have nearly doubled over where they were in January 2022.

MBA is forecasting 30-year rates to hit 5.2% in the third and fourth quarters, ticking down slightly in 2023. Fannie Mae forecasts that the rate could hit 5.5% in the third quarter and then gradually settle back down to 4.9% in the fourth quarter of 2023.

Read More: Home Equity Lending to Fuel Accelerated Loan Growth for Banks

Big Impact on Home Building

D.R. Horton, the nation’s largest home builder, reported that for the quarter ending in June 2022 net sales fell 7% compared to the previous year in terms of number of homes. In addition, Horton’s cancellations hit 24% in the quarter, versus 17% in the same quarter in 2021. PulteGroup, the country’s third-largest home builder, reported that its cancellations were up to 15% for the quarter, versus 7% in the year earlier period.

Both firms are promoting limited-time lower-rate mortgages on their website home pages.

Home remodeling falls off
In recent years, both due to the pandemic and rising home prices, neighborhoods have seen homes get extensions, porches, dormers as well as other major improvements. In the second quarter of 2022 the National Association of Home Builders announced that its 100-point-scale Remodeling Market Index had fallen by 10 points compared to the second quarter of 2021.

“Although most remodelers across the country are still positive about the market, a growing number are starting to experience symptoms of a slowdown,” NAHB stated. “Some customers are showing a reluctance to go forward with projects due to the higher costs and delays associated with material shortages, as well as higher interest rates.”

Read More: Technology & Innovation Key to Growth in Tough Mortgage Loan Market

What Happens If There’s a Recession?

Looming behind all this is the worry about major trouble caused by a recession.

In a blog, American Enterprise Institute Senior Fellow Desmond Lachman warned that “almost every U.S. recession has been led by a slump in the housing market. This is why the crumbling presently underway in the housing market should be grabbing our attention.”

When Fed Chairman Jerome Powell met on July 27 with reporters after the Federal Open Market Committee decided to raise rates again, much of the question-and-answer session consisted of Powell dealing with variations on the question, “Are we going to have a recession? Are we in one now?” Regarding current conditions, he doesn’t think so — “too many areas of the economy are performing too well.”

Powell said a slowdown in growth was necessary to bring inflation down. He added that price stability is “really the bedrock of the economy.” He noted that there are two sides to the risk of causing a slowdown — apply the brakes too much and it goes beyond what was needed. However, he added, doing too little “only raises the cost of dealing with it later.”

Powell isn’t alone in this view. During a Moody’s Analytics “Inside Economics” podcast, Mark Zandi, Chief Economist, declared that “the consumer is the firewall, in my mind, between continued economic growth, albeit weak, and an outright recession.” He said many consumers have kept spending, but reasonably, so they haven’t felt as much pressure from inflation as they might have. Many are still working off of excess savings built up during the pandemic, from stimulus payments and more. Consumers’ credit leverage continues to be relatively low, as well.

Read More: What Big Banks Are Saying About Inflation & Recession

“The firewall feels strong because we’re still creating a lot of jobs,” said Zandi. He also said that debt service is pretty low, because interest rates until recently were very low.

“Home prices are up about 20%,” Zandi added, “so the net is that consumers are as wealthy today as they were a year ago, and they are a lot wealthier than they were three years ago, five years ago or ten years ago.”

“If you add it all up, it suggests to me that the consumer is going to hang tough,” says Zandi.

But at the other end of things is economist Nouriel Roubini, whom some call “Dr. Doom,” who has been sounding a warning in podcasts and blogs.

Roubini believes supply-driven inflation has played a stronger part in the current period and notes that such “stagflation” raises the risk of a hard landing.

In a blog in the U.K.’s The Guardian, Roubini paints a bleak picture, culminating in this: “Though the current global situation confronts us with many questions, there is no real riddle to solve. Things will get much worse before they get better.”

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