The U.S. mortgage market hit bottom in 2014.
Chief economists at Fannie Mae and Moody’s Analytics Inc. as well as the Mortgage Bankers Association all predicted a turnaround this year after a record decline in 2014.
“The worst is over,” said Mark Zandi at West Chester, Pennsylvania-based Moody’s Analytics. “Mortgage bankers will feel a lot better by the end of the year than they do right now. It will be a long, slow climb out, but better days are ahead.”
Home lending plunged 36 percent last year, according to the MBA, to the lowest since 1997, when the Dow Jones Industrial Average first broke 7,000. The drop was led by Wells Fargo & Co., where originations fell 50 percent from a year earlier, and JPMorgan Chase & Co.’s 53 percent decline, the banks said yesterday in earnings reports.
The market is poised for revival this year as a tighter labor market spurs wage growth and borrowers have an easier time qualifying for mortgages. The first-time buyers who have been the missing link of the housing recovery will be drawn into the market by a rule-change at Fannie Mae and Freddie Mac that allows down payments as low as 3 percent, said Douglas Duncan, the chief economist at Fannie Mae.
Home loans for refinancing and purchases probably will rise 6 percent in 2015 from last year, according to the MBA. Duncan estimated home purchase mortgages will rise 6 percent, while refinancing loans will fall 7.1 percent. In 2014, lenders made $1.1 trillion in mortgages, according to MBA data.
Last year at Wells Fargo, the largest U.S. home lender, mortgage volume dropped to $175 billion, the lowest since 2000. At JPMorgan, the No. 2 lender, it fell to $78 billion.
Wells Fargo Chief Executive Officer John Stumpf said on a conference call with analysts yesterday that originations in 2015 probably will increase to as much as $1.2 trillion as new government policies expand the number of people who will qualify for loans.
“It got too restrictive and customers who deserved a loan, who wanted to buy a home and could afford it, could not get credit,” Stumpf said. “I don’t want to overstate the amount of those folks, but there was that element, and I think we’ve come to a much better place with regulators, with the industry, and with customers.”
The housing recovery that began in 2012 was put on hold last year as young buyers worried about their jobs and cash flow, said Zandi. The share of purchases by first-time buyers fell to the lowest on record, according to the National Association of Realtors. It will increase this year as wages gain about 3.5 percent in 2015 and 2016 — a pace last seen before the 2008 financial crisis, he said.
“We’re going to see a resurrection in wage growth,” Zandi said. “That’s going to give potential homebuyers a lot of financial firepower and give them the boost of confidence they need to make a big-ticket purchase like a home.”
The income acceleration began at the end of 2014 as the unemployment rate dropped below 6 percent, according to data compiled by Bloomberg. In the three months ended in November, the median household income gained 1.7 percent, the fastest for that period since 2006. The median income was $53,880 in November, up 4 percent from the post-recession bottom of mid-2011, according Sentier Research LLC.
The bigger paychecks will boost household formation, a key indicator for demand, said Duncan of Fannie Mae. The number of people who buy or rent their first home will increase 41 percent to 1.1 million, the highest in three years, according to a forecast by IHS Global Insight, an economic data and research firm.
“This economic downturn had a much bigger impact on people’s view of risk-taking than any previous recession,” said Duncan. “Young people haven’t been in a hurry to move out of their parents’ basements.”
Lenders’ higher credit standards following the housing crash in 2008 also have cut the flow of mortgages. Banks have only gradually eased their credit score requirements after taking loses from buying back soured loans with underwriting errors from Fannie Mae and Freddie Mac, the government-run mortgage companies.
The average FICO credit score on purchase loans backed by Fannie Mae or Freddie Mac was 754 in November compared with 759 in 2013, according to mortgage technology company Ellie Mae.
The Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, has been clarifying rules governing when lenders must buy back defaulted mortgages. That could nudge banks to lend to slightly riskier borrowers.
“Clarity about what the rules mean and how they will be enforced will help lenders to be less gun-shy,” said Zandi of Moody’s Analytics. “They’ve shelled out billions of dollars since the recession because of bad mortgages. They aren’t in the mood to take any risks.”
More household formation will shrink the rental vacancy rate to 6.3 percent in 2015 and 5.8 percent in 2016, according to IHS Global Insight. That will put pressure on rents, which will tilt the “buy versus rent” comparison in favor of homeownership, Duncan said. The share of Americans who own their own home dropped to 64.4 percent in the third quarter, the lowest since 1995, according to the Census Bureau.
Last month, Fannie Mae and Freddie Mac decided to lower their minimum down payment to 3 percent from 5 percent. The move will expand lending to young buyers who are struggling with student debt as they try to save for down payments, said Lindsey Piegza, chief economist at investment firm Sterne, Agee & Leach, Inc. College students are saddled with an average of about $30,000 in education loans by the time they graduate, she said.
“The average twenty-something would need up to 10 years to save a 20 percent down payment for a house,” she said. “Once you cut it down to 3 percent, all of a sudden you get the timeline down to six months or a year.”
In another move to assist young Americans, President Barack Obama last week announced the Federal Housing Administration is cutting its mortgage insurance fees at the end of the month. The typical first-time homebuyer will save about $900 in their annual mortgage payment, according to the FHA. After the FHA ratcheted up fees in early 2014 to avoid insolvency, lending to first-time borrowers plummeted.
The combination of mortgage rates near 4 percent and the reduction of FHA fees is going to make a significant difference in the ability of families to buy homes, said Zandi.
“You need newcomers to the market because when they buy a home, the seller can move up,” he said. “They start the chain reaction that drives the housing market upward.”