It is still unclear how the housing market will react as it comes off of its recent high. There are conflicting accounts as to how the housing market will perform.
Housing will Falter but not Tumble
According to a Harvard Joint Center for Housing Studies report, the housing market will continue to slow but will not experience the dramatic fall that several economists have predicted. The authors point to four reasons to support their findings.
- Thriving household growth — The United States will add 1.37 million new households in 2006. The growth comes from both natural population growth as well as immigrants.
- Aging baby boomers — The baby boomer generation is poised for retirement, and many have begun to buy second homes, which should minimize a substantial decline in demand in cities that have experienced rapid price appreciation.
- Changing household characteristics — There are more single-person or smaller family-unit households than in previous years. The authors of the study point to a higher divorce rate, fewer adult children living with their parents, and more households in communities of similar population sizes than in years past.
- Lower risk for adjustable rate mortgages — Several mortgage players worry that borrowers who took out adjustable rate mortgages will not be able to afford their monthly mortgage payments as rates rise. However, the authors argue most of these owners will have already seen their houses appreciate in value and that they can sell their houses at a profit if they cannot afford their mortgage payments. Even if house prices drop, it is unlikely the decline will wipe away all of the recent increases in equity. If prices were to drop on a wide basis, interest rates should follow suit, allowing borrowers to refinance their homes to a lower rate.
A Severe Correction is Inevitable
However, a joint study by National City Corporation and Global Insight argues that the bubble correction could be severe. It states that house prices continue to appreciate, albeit at a slower rate than in previous quarters, which only increases the possibility of significant corrections in many metropolitan areas. There are now 71 metropolitan areas that represent nearly 40% of all single-family homes that can be classified as “extremely overvalued.” In comparison, only one percent of single-family homes carried that classification in the first quarter of 2004.
The joint study argues that prices cannot rise forever and will correct themselves, especially after a substantial increase. The catalyst for the correction could be when workers begin to relocate to more affordable locations. And once prices begin to fall, the authors conclude that it takes an average 3.5 years before the housing market regains its footing. The questions are when housing will begin its fall and how drastic the correction may be.
Whichever viewpoint is more credible, credit union real estate lending grew 13.74% in the 12 months ending March 31, 2006. Existing home sales for the mortgage industry fell to 6.76 million in April. Meanwhile, The Housing Market Index, which follows new home sales, increased in April to an annualized rate of 1.20 million units. Credit unions should closely monitor price levels in their communities, demographic characteristics and delinquency ratios – particularly on adjustable rate mortgages. By understanding the potential housing risk, credit unions can proactively manage their pipeline and existing mortgage portfolio.
If house prices enjoy a soft landing, one product that credit unions should considering adding to the mortgage selection is reverse mortgages. Reverse mortgages allow seniors over the age of 62 to withdraw equity from their house so they have more cash on hand. While the house is the primary collateral piece for the loan, seniors can only take out a certain percentage of their appraised house value based on their age, house value, location, and current interest rates.
To hear from leading credit union executives who have implemented a reverse mortgage program, Callahan & Associates is hosting Addressing the Feasibility of Reverse Mortgages, its third quarter mortgage lending series webinar sponsored by Charlie Mac.