Mortgage lending has been a major factor in the success of credit unions over the past couple of years. As peak season for home sales approaches, my outlook for mortgage lending remains positive.
Barring a sudden, sharp rise in interest rates, I expect volumes to increase. Why? Demand, credit, and home prices.
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Rental costs have surged while vacancy rates have fallen, which tells us household formation has escalated. And although there are a number of reasons new households are renting and not buying, the fact is the pool of potential homebuyers has grown. The rent-versus-own comparison has turned toward ownership in the majority of markets as rents have soared. The frustration of paying ever-higher rents is increasing the motivation to buy.
I expect monthly job gains to average 150,000 or better. This is down from 2014 and 2015 but twice what is needed for the job market to tread water.
The U.S. Bureau of Labor Statistics’ hourly wage component shows meager gains of 2.0-2.4%, but other, broader indicators suggest wage gains are accelerating.
The Atlanta Fed’s measure, which includes bonuses and other compensation, estimates overall wages are rising at a pace of 3.2%.
Moody’s Analytics looked at wages for workers in the same job for at least one year and found wages are rising at a pace of 4.1%. I expect wages will continue to increase as the available labor pool shrinks.
That covers demand and credit, but what about home prices?
The future of home prices is not relevant to a credit union that sells its originations, but it matters a great deal to those that hold loans in portfolio.
In California, where I live, I am asked more and more often, “Do you think we’re in a housing bubble?”
My answer is a strong “No” (with one caveat).
Home supply is low. Nationally, the supply of homes on the market is roughly five months compared to a normal supply of six months. But the supply of homes in active, heavily populated markets is in the range of two to three months.
With rising demand, as I expect, and low inventories, prices should at least remain stable.
Also, cash is still king.
The historical average for all-cash sales is less than 25%. Nationally, all-cash home sales retreated to roughly 35% in 2015, down from 45% in 2014 and even higher in prior years. All-cash sales in areas that Wall Street money poured into reached as high as 70% in 2012 and early 2013.
But home prices have climbed over the past five years, meaning anyone who bought a home in that period would have equity — in many cases substantial amounts — in the home.
Unlike during the housing bubble, creditors have required buyers to have large down payments and good credit. Even non all-cash buyers have had to lay out significant cash.
Home prices can certainly flatten out, and in some over-heated markets, I think that will happen. But given the amount of skin in the game for homeowners, I don’t see the pieces falling into place for a housing bubble.
However, there is one caveat for housing — a recession. If the United States enters a severe recession that results in big job losses, all bets are off.
But isn’t that the case for everything?
Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.