New mortgage originations are at their lowest level since at least 2000, according to a study released yesterday by Black Knight Financial Services, with data going back to the begining of the millennium. The new data surprised many analysts, who have watched the real estate sector gaining momentum in the last two years.
Part of the explanation is simple: refinances have plummeted, since interest rates started rising about nine months ago. Hardly surprising, as interest rates have been so low, for so long, that it is hard to imagine any homeowner who has not yet locked in a low long-term interest rate.
But refinances are only a small part of the larger picture. Purchase mortgages are down precipitously, and for an improving real estate market, that is rare and perhaps troubling. So what is causing purchase loan originations to falter?
To begin, credit markets remain tighter than many analysts expected after several years of sharp real estate appreciation. "Credit standards have shown little sign of easing — only about 30 percent of 2013 loans went to borrowers with credit scores below 720," noted Herb Blecher of Black Knight.
About half of potential homebuyers have a credit score below 700, but very few of them are being approved by banks. Nor is it an even distribution of who those half are: they are overwhelmingly on the lower end of the real estate market, which means the market recovery has been largely one-sided. The National Association of Realtors reports that home sales between $750,000 and $1,000,000 leapt by 13% in February from one year earlier, while homes priced below $100,000 dropped by 18% percent year-over-year.
With growth largely restricted to the high end, many low- and middle-income homeowners remain stalled upside-down on their mortgages, since demand and subsequent value appreciation have lagged. Which raises a related cause of the low loan origination rate: low housing inventory available for sale.
Many areas, like San Francisco, have such restrictive building regulations that there effectively is no low- or middle-income housing, because even small increases in housing demand create significant price leaps, since so little new housing is forthcoming. And in other parts of the country, developers have been timid in their commitments and projects, still skittish after the housing collapse a few years ago. "There have not been a great amount of speculative home starts by homebuilders," states Hollis Greenlaw, CEO of United Development Funding, a Dallas-based single-family construction funding firm. "Homebuilders have been starting homes only where there has been a ready, willing and able home buyer."
The development that has taken place is nearly all on the middle-to-high-end of the spectrum, largely because of the tight credit conditions outlined above but also because the demand for lower-end housing simply has not been very high.
There is little sign that inventory or credit conditions are about to dramatically open up, either. Lenders explain that until they receive guarantees from Fannie Mae and Freddie Mac – referred to as “representations and warranties” – on higher-risk borrowers, it does not make sense to lend to them. Without these guarantees and a relatively simple foreclosure process to collateralize the risk, banks will continue to only lend to high-credit, high-income borrowers.
Still, there is plenty of evidence available that many people are better off as renters (and that the economy as a whole is better off with fewer homeowners), rather than homeowners. The report also found that cash sales are up, accounting for nearly half of all residential real estate transactions. In a final piece of good news, non-distressed sales were up almost 15%, even though total transactions were roughly flat year-over-year; perhaps the recent trends towards cash transactions and renting are not all doom and gloom for the economy after all.