Despite the Federal Reserve ending their mortgage-backed security purchase program, this has not had a huge impact on prices. Namely, because the supply of mortgage-backed securities is down considerably.
Often times there is a tremendous amount of speculation in the mortgage industry regarding supply and demand, foundations in any free market. After two years of frenzied volumes, margins, revenues, and incomes, in 2022 those items have dropped precipitously. Many research and economic departments have recently begun writing about the activity of residential mortgage debt. The Mortgage Bankers Association continues to report that application numbers are dropping industry-wide. Housing values, which, on average, over time and across geographies, move slowly higher, are probably at risk of losing some of the 20 percent/per year recent gains. One topic worthy of consideration is the fundamentals of our market, specifically, what is holding down stronger growth in the mortgage market?
Lenders are well advised to be aware of trends. In terms of overall demographics, homeownership rates in the U.S. began at 65.3 percent in the first quarter of 2020 and ended at 65.5 percent by the fourth quarter of 2021. Although the pandemic years have changed things somewhat, the young adult homeownership rate dropped 10 percent between 1960 and 2017, reflecting a shift toward renting. First-time homebuyers made up 34 percent of all homebuyers in 2021, an increase of three percent from the previous year.
The National Association of Realtors recently released its annual Home Buyer Profile. To sum up the lengthy report, a snapshot taken in July of 2022, first-time buyers made up 26 percent, down from last year’s 34 percent. This is the lowest share of first-time buyers since the data collection began. The typical first-time buyer was 36 years old this year, rising from 33 last year, while the typical repeat buyer age climbed to 59 years. Both are all-time highs. 61 percent of recent buyers were married couples, 17 percent were single females, 9 percent were single males, and 10 percent were unmarried couples. This is the highest share of unmarried couples recorded.
The survey shows that 88 percent of buyers were White/Caucasian, 8 percent were Hispanic/Latino, 3 percent were Black/African-American, 2 percent were Asian/Pacific Islander, and 3 percent identified as “other.” The share of White/Caucasian buyers and Hispanic/Latino buyers both grew this year, while the share of other racial and ethnic groups declined.
Who is the primary driver of supply of residential loans made to these borrowers into the capital markets? The GSEs are a good place to start. Government-sponsored enterprises have made up most of the growth and volume in the mortgage lending market in recent years, and Fannie Mae, Freddie Mac, and (indirectly) Ginnie Mae, have surged in mortgage originations compared to private institutions. Non-QM originations, funneled into the capital markets through “private label” securitizations, have failed to live up to the volume hype predicted by that segment of lenders and investors.
Mortgages originations from private entities, like insurance corporations and affiliate institutions, have fallen to historical lows, mainly as a function of their inherent risk premiums; it’s hard to compete with the GSE’s daily rates. It’s important to note that the current lending environment remains relatively inexpensive (compared to only a decade ago). In looking at historical norms, he percent of loans approved but not accepted has fallen, although with 30-year rates currently in the 7’s that is much more typical than 30-year rates in the 2’s or low 3’s as we saw for much of 2020 and 2021. Borrowers are likely turning down loans because of rate barriers. As some will note, the Dodd Frank Act and the Volcker Rule place limitations on the risk level associated with mortgage originations for some lending institutions, and certainly is suppressing mortgage lending growth to a point.
Given the rate environment, lenders have shifted to temporary buydown products as well as adjustable rate loans. Demand by borrowers for mortgage products could be parsed into a hundred categories, as there are substantial differences among loan applications by income, gender, race and ethnicity. It’s no shock that the highest income bracket has consistently applied for more mortgage loans than any other bracket. It’s intuitive that the lowest income bracket applied for the least number of mortgage loans.
With shifting socio-economic responsibilities in today’s world, demand for loans by gender has shifted over the past few years. Historically, applications have been primarily led by males, although there was a brief period from 2005-2007 where females led the number of mortgage loan applications. During this time the percent of loan application denials by gender was fairly even, leading many to believe that the surge in female loan applications was likely due to increased confidence in loan approval rates for females.
Recently, the Biden Administration has put forth initiatives centered around affordable housing. The Federal Housing Finance Administration, through Freddie Mac and Fannie Mae, has renewed its interest in first-time home buyers and underserved segments of the population to encourage home buying. Traditional minorities in the United States have driven demand for home mortgages, led by the Hispanic segment. This is a reversal from past recessionary periods, where this group saw one of the largest declines in mortgage applications. White/non-native population has consistently applied for the highest number of loans with Black/African-American, Hispanic, and Asian populations following. Demand by various segments of the population tend to ebb and flow over time, as one would expect.
As we head toward winter, there is a lot of dreariness among lenders and vendors. The mortgage market is cyclical and will rebound. In the past, any recovery has been a slow, and progressive, growth campaign. Popular opinion appears to support an increase in activity in early or mid-2023 over the next several quarters as the market gains momentum, which of course is dependent on many macro factors yet to be determined.
Mortgage supply of loans into the capital markets is a relatively lopsided affair, as it has shifted towards government-sponsored enterprises, which have received the highest number of applications over the past couple years and have originated the largest number of mortgage loans. Mortgage demand has seen some shifts by income, gender, race, and ethnicity over the past few years, which could be due to multiple factors including denial and lending rates offered. Higher income individuals, usually males, and some minority populations have shown the largest increase in mortgage demand since the credit tightening. If lending standards ease, expect demand to pick up across other categories and spur further growth in the mortgage market.
Would you like to speak to STRATMOR about our services? Contact us today!
Let us light up your strategy discussions.
Feel free to reach out with any questions or needs we might be able to help with.
