The Hynes Convention Center in Boston hosted last week’s 94th annual Convention and Expo held by the Washington, D.C.-based Mortgage Bankers Association.
Wait ’til next year.
If the forecast holds, it would mean the second half of 2008 will see some life return to the market. But getting to that point will mean paring down the housing inventory.
“It will be some time before we see the supply worked off,” said Douglas Duncan, senior vice president and chief economist for MBA. Duncan outlined his forecast in the closing session of the MBA’s 94th annual Convention and Expo, held last week in Boston’s Hynes Convention Center.
Trying to cut that inventory will mean working through several obstacles, Duncan said. For one, certain mortgage product offerings are no longer available, as lenders gravitate toward conventional, agency-backed loans, he said. Available credit is shrinking, as investors shy away from the market, he added. And tightening government regulations could further limit market activity, he said.
Allan I. Mendelowitz, a director on the Federal Housing Finance Board since 2000, repeated Duncan’s point about the rising inventory. Using data from the Washington, D.C.-based National Association of Home Builders, Mendelowitz showed the MBA convention audience that the national level of housing inventory – including condominiums and single-family units – has more than doubled to around 4.5 million since 2002.
Effects of inventory excess continue to show up in other reports from NAHB. Builder confidence, reflected in a national market index NAHB conducts with San Francisco-based Wells Fargo, fell in the latest results released last week.
The 20-year-old index fell to its lowest point on record, with a score of 18, according to NAHB. Scores below 50 indicate a “poor” level of confidence. In the Northeast, the index dropped to 26. The West and South fell to 14 and 21, respectively, while the Midwest moved up to 15, according to NAHB.
Some of the key reasons for the shaky confidence include ongoing problems in the mortgage market, as well as the high inventory levels of unsold units, according to the report.
For 2007, Duncan predicted that new-home sales will decline by 22 percent from 2006 to 819,000 units. Another drop of 10 percent is predicted for 2008, he said. But in 2009, new-homes sales will go up around 6 percent, he noted.
The news was fairly similar for existing-home sales.
Total existing-home sales will finish 2007 around 5.72 million units, representing a drop of about 12 percent versus 2006, according to Duncan. In 2008, sales will drop another 10 percent, before gaining 5 percent in 2009, he predicted.
Meanwhile, home prices for both new and existing homes are expected to decline this year, Duncan said, with median prices falling about 2 percent. A similar decline is forecast for 2008, before prices flatten in 2009, he added.
‘A Permanent Factor’
NAHB’s latest data on building permits appears consistent with the MBA forecast.
The number of permits issued fell 7.3 percent in September to an annualized rate of 1.23 million units, according to NAHB. Single-family permits were down 7.1 percent to 868,000 units, and multifamily permits were down 7.7 percent to 358,000 units, according to the report.
Regionally, permit issuance fell 4.1 percent in the Northeast, 2.4 percent in the South and 23.3 percent in the West, according to NAHB. The Midwest was the only region to show a gain, moving up 3 percent.
On the mortgage side, Mendelowitz said putting the brakes on declining figures will mean leaning on the government-sponsored enterprises, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., aka Fannie Mae and Freddie Mac.
“The importance of GSEs and portfolio lenders is only going to increase,” Mendelowitz said. “The GSEs have turned out to be absolutely critical in maintaining liquidity.”
Since the accounting scandals at both GSEs in 2003, and the subsequent portfolio caps on Fannie and Freddie, the volume of mortgage-backed securities issued by the GSEs dropped by about half, to around $1 trillion, Mendelowitz said. At the same time, the volume of Alt-A (rated between prime and subprime) and subprime mortgage-backed securities grew.
The growth of private market alternatives to the GSEs “took place in a period of tremendous excess liquidity,” Mendelowitz said. And as the market for subprime and Alt-A grew, the market showed signs of relaxing credit standards.
Mendelowitz highlighted a few of those signals, such as the increase in the loan-to-value ratio among new homeowners. The percentage climbed from 74 percent in 2003 to 84 percent in 2006, according to Fitch Ratings data Mendelowitz presented. The debt-to-income ratio for new borrowers also increased during that same period, from 37 percent to 41 percent. Likewise, the percentage of borrowers using stated income loans – loans where the borrower does not supply documentation verifying income – increased from 45 percent to 60 percent. And the percentage of new borrowers using a second mortgage to cover purchase costs not included in the first lien grew from 20 percent to nearly 40 percent, also from 2003 to 2006.
Looking forward, Duncan said he expects residential purchase mortgage originations to decline about 15 percent this year to $1.18 trillion versus $1.40 trillion in 2006. Based on the declines in both home sales and home prices forecast for 2008, Duncan forecast that purchase originations will fall by 15 percent to $1.00 trillion next year. As with home sales and permitting, Duncan forecast improvement for 2009, with purchase originations climbing about 5 percent.
Total mortgage production – including both purchase and refinance loans – will be down nearly 15 percent to $2.31 trillion this year compared to $2.73 trillion in 2006, he said. Another 18 percent drop is forecast for 2008, he said. Despite the 5 percent gain forecast for purchase originations in 2009, total originations are expected to drop 6 percent in 2009, due to projected 18 percent decline in refinance originations.
One of the lessons from the current credit crunch, Mendelowitz said, is that “Washington needs to take a timeout and rethink the current effort to alter the regulation of the GSEs. A better understanding of both financial market defects and the important role of GSEs as providers of appropriate liquidity is needed to inform any legislative effort.”
Mendelowitz also noted the importance in understanding the market’s cyclical nature.
“The first thing we’ve got to learn is that financial markets are not stable,” Mendelowitz said. “Periodic crises are in fact a permanent factor in financial markets.”
