Mortgage Market Update for May 14th

Keeping you updated on the market!
For the week of

May 14, 2012

MARKET RECAP

Nineteenth-century Scottish writer Thomas Carlyle is best known for coining the brickbat “the dismal science” when writing about economics. To be sure, economics can be dismal when it's perverted by agenda or predetermination. But when embraced dispassionately, economics is a wellspring of irrefutable laws of human behavior.

One such law is that lower prices stimulate demand, and, thus, clear markets. We see this law continue to work its restorative magic on the housing market today. Move Inc., a real estate Web site, reports appreciable price turnarounds in Miami, Orlando, and Oakland. The most impressive turnaround, though, is occurring in one of the hardest hit markets, Phoenix, which has posted year-over-year price appreciation of 26.9%. Concurrently, inventory has declined 48%.

This irrefutable law of supply and demand is the reason we're optimistic that housing has turned for the better: Lower prices drive demand; higher demand, in turn, leads to rising prices.

What's more, as markets clear and stabilize, and as the economy recovers, the incentive to stay put and pay the mortgage loan rises. Therefore, we were not surprised to read a TransUnion report that showed the national mortgage delinquency rate hit its lowest point since 2009. According to TransUnion, all but eight states saw decreases in mortgage delinquency rates in the first quarter of 2012.

The good news for buyers is that markets are still clearing, which means affordability remains historically high. Fiserv reports that a conventional mortgage payment on a median-priced home now represents just 12% of the median-family income – the lowest percentage since records began in 1971.

Mortgage rates are obviously a factor in Fiserv's affordability index. Due to heightened uncertainty surrounding Greece and the European Union, investors have again flocked to the haven of U.S. Treasury notes. This helped push mortgage-lending rates down fractionally to another all-time low this past week.

How long can low rates and high affordability be sustained? Not indefinitely, that we can say for sure. Fiserv also reports increased price stability across a widening swath of the nation. Meanwhile, CoreLogic's data show inventory levels have dropped to the point where price backslides are highly unlikely. Low inventory stimulated Phoenix's price increase. Now, it's just a matter of time before the most beleaguered market, Las Vegas, sees low inventory and more demand drive its home prices higher.

It's worth keeping in mind that the laws of supply and demand work in the mortgage market too. The busier the market becomes, the more demand that occurs, the easier (and more profitable) it becomes for lenders to ration supply by price. With HARP 2.0 and other government programs to help stimulate demand, plus a rebounding housing market, demand for mortgage loans will likely increase throughout the su mmer.

The bottom line is we still see little upside in waiting to apply for, or lock in, a mortgage loan.

Economic
Indicator

Release
Date and Time

Consensus
Estimate

Analysis

Consumer Price Index
(April)

Tues., May 15,
8:30 am, et

All Goods: 0.0%
Core: 0.0%

Important. Given the rise in energy and food prices, it's difficult to believe the CPI won't show an increase.

Home Builder Index
(May)

Tues., May 15,
10:00 am, et

26 Index

Important. Builder sentiment is expected to turn optimistic, which points to an uptick in new home sales.

Mortgage Applications

Wed., May 16,
7:00 am, et

None

Important.Purchase activity continues to trend higher, which suggests robust late-spring home sales.

Housing Starts
(April)

Wed., May 16,
8:30 am, et

690,000 (Annualized)

Important.Permit numbers point to increasing residential construction.

Let's Expand This Market

We are speaking of the mortgage lending market. In short, the market needs to grow and needs to be more inclusive. This isn't just our conclusion. Experian recently produced a white paper that notes lenders will be unable to meet portfolio-growth objectives without expanding the market base. That means the base must be more inclusive and be less centered on prime borrowers.

Experian estimates that 17.3 million prospects are being overlooked. This isn't deliberative on the mortgage market's part. The issue is that many of these otherwise reliable potential borrowers have little credit history. The way the market is set up today, borrowers with little credit history are being under-served to an extent that shouldn't be.

The good news is we are moving in a more inclusive direction, thanks to increased activity in the private mortgage-backed securities market and private bank placement. More securitization that occurs outside the government-sponsored entities increases lending diversity, thus making it easier to expand the lending base. Let's hope private interest grows.

The base could be further expanded by throttling back on regulation, which itself is exclusive and raises the cost of lending. The Mortgage Bankers Association is tracking some 100 new rules in the Dodd-Frank Act. Less restrictive lending rules will also go a long way toward expanding the mortgage-lending base and clearing and expanding the housing market.