DS News - Digital Archives

» VISIT US ONLINE @ DSNEWS.COM BARCLAYS ISSUES HOUSING FORECAST MOODY'S PREDICTS STRONG MARKET DESPITE SLOWDOWN Despite some softening housing indicators, Moody's Analytics predicts the housing market will remain strong through 2014 and 2015. "The fundamental drivers of housing remain solid," Moody's reported in its monthly ResiLandscape report. "Employers are adding jobs, housing is still affordable, and inventories of homes are low. Home sales, homebuilding, and house prices will all head up this year and strengthen further in 2014 and 2015 as housing helps to fuel the broader economy's expansion. These positive factors will offset the dampening impact of rising mortgage interest rates on demand for housing, although a faster than expected run-up in rates could derail the housing rebound." Moody's expects rising interest rates to cause a drop in refinancing, which in turn will prompt banks to loosen credit and underwriting requirements in an effort to generate new business. Pending home sales are still high and supplies of new homes are tight. "The rapid price gains of the last year cannot be sustained, and we expect the pace to decline substantially in the second half of this year," Moody's said. "Strong investor demand helped to fuel those gains and investors are starting to pull back as the supply of inexpensive distressed homes has dried up. A slower pace is a positive for housing demand and will help to keep affordability from further eroding." These conditions should "ignite a virtuous cycle," in which homebuilding stimulates other sectors of the economy, including the manufacturing, retail, and financial sectors, Moody's predicts. "Stronger job growth will in turn generate stronger housing demand. Indeed, despite some softening during the second quarter, housing is already a driver of broader economic growth." Moody's warns that the greatest threat to this growth could come in the form of rapidly increasing mortgage rates that disrupt the housing recovery. Barclays forecasts U.S. housing prices to rise by 11 percent in 2013 and 7 percent in 2014, based on data through the second quarter. Prices are up 8.9 percent year-to-date through August, according to Barclays' Housing and Residential Credit Outlook released in October, which takes into account price movement as reported by the Federal Housing Finance Agency, CoreLogic, and the S&P/Case-Shiller Indices. Barclays' analysts expect 3.5 million liquidations during the next three years. They note that close to 2.5 million homes today are seriously delinquent or in foreclosure, and most will eventually need to be sold as REO or short sales. And they expect to see a steady trickle of 60,000 to 80,000 distressed sales per month for several years. The percentage of distressed real estate is likely to fall most dramatically in Florida in the coming years, according to Barclays' analysts. In the nearer term, they expect distressed inventory to grow slightly in Arizona, California, New York, Ohio, and Texas in 2014. Distressed inventory is anticipated to fall slightly in Florida, Michigan, and Nevada over the next year. Barclays forecast 309,000 new REOs added to the housing stock this year, with than annual number slipping to 300,000 by 2017. The Barclays report noted that mortgage rates increased by 100 basis points between May and July of 2013. The agency expressed concern that higher mortgage rates, especially in large, desirable cities, could decrease demand and thereby affect home price appreciation. However, Barclays noted, "Supply in most parts of the U.S. is elastic enough over the medium run to counter changes in demand due to changes in rates. As such, even if home prices move a little bit in the near term to adjust for changes in affordability, the effect is mostly absent over the medium term." The firm's analysts went on to explain, however, that "this is not true in areas where supply is less elastic due to land constraints or regulations on new development. In those areas, we estimate that home prices decline by roughly 5-10 percent, cumulatively, for every 100bp increase in rates compared with if rates had stayed unchanged." COMMUNITY BANKERS CONCERNED WITH SECONDARY MARKET REFORM With Congress pondering (among other things) how best to reform the nation's housing finance system, Independent Community Bankers of America (ICBA) urges lawmakers not to count smaller banks out when drafting new policies. In a white paper released last month, ICBA warns policymakers to "be careful not to create a new [secondary market] system that destroys liquidity for all but the few largest players, limits access to the market or narrows options for smaller lenders, and imposes requirements that make it too costly for smaller lenders to operate"—a common thread among the major proposals presented so far, the group says. "My community bank depends on easy access to the secondary market that doesn't require me to sell loans to a competitor," said Jack Hopkins, chairman of ICBA's Housing Policy Task Force and president and CEO of Sioux Fall's CorTrust Bank. "Consumers are better served by a diverse, competitive market with thousands of active mortgage lenders, including community banks, which specialize in personalized and customized lending that megabanks are structurally incapable of providing," Hopkins added. In addition to preserving the relative simplicity of the current loan selling process and avoiding industry consolidation, ICBA says lawmakers must make sure that any secondary mortgage market reform ensures "robust oversight by a strong and competent regulator" and maintains "an explicit government guarantee against catastrophic loss." Going forward, it will also be crucial to protect originators' rights to retain servicing after selling a loan, the group says. "In today's market, the large aggregators insist that lenders release servicing rights along with their loans. . . . . While servicing is a low-margin business, it is a crucial aspect of the relationship-lending business model, giving community banks the opportunity to meet the additional banking needs of their customers," the white paper reads. With these concerns addressed, community banks are prepared to "adapt and thrive" in the private-market environment Congress is trying to restore, ICBA says. KNOW THIS FHA has insured more than 34 million properties since its formation, and currently insures more than $1 trillion in U.S. home loans, notes Dan Green, a loan officer with Waterstone Mortgage and regular contributor to TheMortgageReports.com. 25

• Cover