In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses mortgage applications.
- People held back from applying for mortgages in the past week. Applications to buy a home fell 5 percent from the prior week, even after accounting for normal seasonal patterns. From the beginning of the year, these home purchase applications have been running around 10 to 15 percent below last year’s figures.
- Home buying momentum is no longer there for now. Some snow and cold winter weather could be a factor. But the predominant reason is likely due to less affordable conditions. Home prices have been rising much faster than income in many markets. Furthermore, institutional investors are likely stepping away from buying (though not yet selling). It would not be a bad thing if institutional investors start to unload in fast appreciating markets because Phoenix, Las Vegas, and Ft. Myers are facing acute inventory shortages.
- Another reason for this year’s decline could be due to new federal regulations that caps mortgage origination fees. Price control leads to less being available. For some mortgage lenders, the 3 percent cap does not allow enough of a compensation to originate low dollar amount loans. The new mortgage rules that went into effect early this year could also be giving pause to lenders, as they would not want to face lawsuits for going outside the rules.
- There is also a possibility that the data is not capturing the full market. Mortgage Bankers Association, which collects the data, indicated oversampling of large lenders and under-representation of smaller-size lenders. So the decline in mortgage purchases may not be as large.
- All-cash deals for home sales still remain extraordinarily high – roughly one-third of all sales. Home sales can still hold even with falling mortgage approvals if cash deals can fill the gap.
- Refinance activity was also lower in the past few weeks. Compared to one year ago, refi business has fallen by more than 60 percent. Higher rates are not conducive for refinances. At least in regards to home sales, it is possible that lenders give a second and deeper look at all home purchase applications since the refinance volume is dying off.
- Though the new federal mortgage rules were well-intended, the consequence is a widening split in wealth. Renters have little net worth. Homeowners have wealth tied mostly to their homes, with a typical homeowner accumulating $32,000 in housing equity over the past two years. A good renter who converted to a homeowner would have that wealth. But the excessively tight underwriting standards are leaving behind many good renters, preventing them from having a chance to participate in the housing wealth recovery. Rather, many investors and multiple property owners have benefited. America is getting more unequal in wealth distribution as a result.