Written By: Joel Palmer, Op-Ed Writer
The economic atmosphere remains calm…for now.
But clouds are forming. The wind is picking up a little bit. A few warning signs have emerged for the mortgage industry to heed.
The latest economic data may result in nothing more than a mild thunderstorm with some heavy rain. But mortgage lenders may also have to prepare for something more severe.
The Fannie Mae Economic & Strategic Research Group’s July 2017 Economic and Housing Outlook indicated that second quarter economic growth came in at a strong 2.7 percent annualized.
However, looking ahead, Fannie Mae researchers expect economic growth to slow to about 1.9 percent in the second half of the year. Concerns expressed in the agency’s latest report include:
• A sharp increase in the consumer savings rate indicating a decline in consumer confidence.
• A slowdown in the growth of corporate profits, “commonly seen in the late stages of an expansion,” according to the report, which“presents a challenge to business investment that is compounded by tax policy uncertainty.”
• A housing market enduring through minimal construction activity and an overall lack of for-sale inventory.
The lack of inventory has been somewhat problematic for the mortgage industry by constraining sales at a time when refinance demand is diminishing due to an uptick in mortgage rates.
Existing home inventory fell 8.4 percent year-over-year in May, according to Fannie Mae, continuing a string of annual declines in for-sale inventory that began in June 2015.
Demand for homeownership remains strong. Given the low supply, home values are on the rise. Fannie Mae is also projecting that 30-year fixed rates will remain at 4 percent or above for the foreseeable future. Both factors will make it more expensive for many potential borrowers to buy a home and make monthly mortgage payments.
At the same time, mortgage lenders are experiencing market pressures that many believe will erode profit margins in the coming months. While Fannie Mae expects purchase mortgages to increase slightly over the next two years, refinances will plummet by nearly two-thirds. Its forecast indicates that refinances will only account for 25 percent of mortgage originations in 2018, down from 48 percent in 2016 and 34 percent this year.
According to the most recent Mortgage Lender Sentiment Survey from Fannie Mae, a large number of lenders plan to ease credit standards to make it easier for borrowers to obtain mortgages.
“By easing credit standards lenders attempt to increase access to homeownership; however, given the extremely lean supply, they may also put additional upward pressure on home prices and reduce home purchase affordability. Resulting affordability challenges might be especially pressing for potential first-time home buyers who, unlike trade-up buyers, are unable to reap the benefit of rapid home price appreciation in their existing properties,” said the Fannie Mae outlook.
If the stress of housing affordability prevents some buyers from entering the market, that’s one thing. But as the industry has experienced in the past, people often opt to stretch their already constrained budgets to afford home buying rather than wait for opportune conditions.
If that happens on a large scale, it will magnify the impact of an economic downturn on the mortgage industry.
While a repeat of the economic hurricane of 2008 may be unlikely, a damaging gale may be forming.
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.