NEW YORK - The topic "Is there a mortgage bubble coming?" was once again tackled in last week's CPR & CDR Technologies conference on Prepayment and Mortgage Credit Modeling & Strategy. Based on Mortgage Bankers Association's most recent housing numbers presented at the conference, the often-discussed topic is a non-event. Participants said that real estate fundamentals still bode well for a healthy housing market in the near term.
According to the MBA, 2004 mortgage originations are currently pegged at $2.66 trillion. Though lower compared to 2003's showing of $3.81 trillion, the current year's number is still high historically speaking. Aside from this, 30-year fixed-rate mortgage rates are projected to remain in the sub-6% range through the end of the year, increasing only to 7% by next year. In other words, the housing market is expected to slow down, but not at a precipitous pace.
Aside from these factors, other housing indicators have remained strong. New single-family homes starts were 1.239 million units through September, compared to 1.122 million units over the same period last year, a 10.4% rise. New single-family home sales through August 2004 were 840 million units, compared to 759 million units during the same time last year, a 10.7% increase. Lastly, existing single-family homes sales was 3.841 million units through July, compared to only 3.424 million units last year, exhibiting 12.2% growth rate.
In his presentation, MBA Chief Economist and Senior Vice President Douglas Duncan discussed supply and demand fundamentals in the housing sector, which continues to appear sound. He also opined about changes in the housing cycle, and how current housing trends are constantly evolving. Focus was also placed on the American consumer's debt burden and its possible effect on the housing sector.
In terms of supply, inventories have remained comparatively modest, Duncan said. Throughout the recent recession, inventories stayed within the four-month supply range. In contrast, in previous recessions, it stayed at an eight-month supply level. The relatively low numbers could be attributed to various factors, including the lack of supply of available land, specifically in some coastal areas. There might also be the factor of more public ownership of home builders. These firms are considered more conservative because they have to take into account shareholders' profitability. The current underwriting conservatism of construction lenders and the environmental cost of development were also mentioned as factors for the current modest supply.
Duncan added that the current modest inventory might change if the number of properties in the market rise or the pace at which these properties are sold increases, however the MBA does not really see this happening in the near term.
On the demand side of the equation, things are also looking good. Demographics, according to Duncan, remain strong. Baby boomers are expected to buy homes even in their 60s, and not, as commonly assumed, only through their 50s. A significant number of immigrants are also expected to purchase homes going forward. Aside from these factors, income growth and affordability remain at healthy levels, contributing to the health of the housing sector. Furthermore, the unemployment rate is currently at 5.5 %, lower than the 6.3% average seen in recent years.
In his presentation, Duncan enumerated the various information sources for the one- and five-year changes in home prices. However, he noted that the most looked at source is the Office of Federal Housing Enterprise Oversight's Repeat Sales Index. Though considered a reliable indicator for changes in home prices, the problem with this index is that it does not track changes in the quality of the homes - such as home improvements made or deterioration in the condition of these houses - but only price shifts from one period to another.
One factor that many participants are worried about is the increase in consumer debt, as lenders seem to continue overburdening them. Duncan said that consumers borrow money for legitimate reasons such as accumulating frequent flyer points by using their credit cards. Aside from this, in one slide Duncan presented on an overview of home mortgage refinancing activity, data showed that borrowers who withdraw equity from their homes use it for valid purposes. Homeowners used up most of their withdrawn equity on home improvement and the repayment of other debts.
Duncan added that the most updated mortgage finance forecast will be presented at this week's MBA 91st Annual Convention & Expo (See next week's ASR for full coverage).
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