Aug 9, 2012

Shrinking Housing Debt Nothing to Fear?

U.S. consumers owed $8.995 trillion on their residential loans at the end of March—the lowest debt figure recorded in almost five years, according to new figures compiled by National Mortgage News and the Quarterly Data Report.
It seems like peak of the market occurred in the fourth quarter of 2009 when consumers owed $10.138 trillion on their homes Since that time, outstanding loan balances nationwide have declined steadily each quarter. Maybe the reason for the reduction in loan balances is loans being removed from the loan tally, plus some consumers that have the ability to refinance are engaging in “cash-in” refis where they bring money to the closing table to reduce their payments even further. According to figures compiled by Freddie Mac, roughly 70% of consumers who are refinancing either keep their loan balance the same or reduce it. In recent quarters that ratio has been as high as 77%. As Freddie Mac economist Frank Nothaft once noted, “This is primarily a 'rate-and-term' market, meaning that the typical homeowner is looking to cut their interest rate or shorten their loan term.”

When Mortgage Servicing Rights ( MSR) begin increasing in size again, that’s a different matter. It likely won’t happen until the housing market stabilizes and more consumers decide to buy new or existing homes—something that will only come when the employment picture improves in earnest.Of the $8.995 trillion in outstanding home mortgages today, 76% are fixed-rate loans, the lowest reading since 2008.Servicing advisors who make their living off of MSRs don’t seem particularly worried about the shrinking residential loan balances. “It’s not something we get hung up on,” said one manager based in Denver. “In time it will start rising again.”Also, investment bankers believe it’s just a matter of time before MSRs begin to rise in value, though they’re not sure when.

As on March 31, Wells Fargo Co. ranked first among all servicers with MSRs of $1.84 trillion, a 2% gain from a year ago. Bank of America ranked second with $1.69 trillion (-16%), followed by JPMorgan Chase with $1.1 trillion (-8%).
The top three servicers, combined, have a market share of 51.57%, according to NMN/QDR. We at PrivoCorp are waiting and watching for the results to improve - and the most important metric we are looking at is the employment picture.

Record Low Rates Drive Refis, But No Sales

New-home sales fell unexpectedly in June, tumbling 8.4%, after sales in May hit the highest level in two years, according to the Census Bureau’s latest snapshot on the housing market.The disappointing drop in sales was partially due to an upward revision in the May figures by 23,000 units.
The Census Bureau reported Wednesday morning (Aug 2012??) that sales of newly built single-family homes fell to a 350,000 seasonally adjusted annual rate in June from a 382,000 rate May.
The April sales rate was revised upward by 15,000 units.Despite the drop in June, new-home sales rose 15% compared to June 2011.Wall Street analysts were forecasting that new-home sales would edge up 1% or less from May to June.After strong sales in the winter and spring, forecasters pared back expectations following a National Association of Realtors report last week which found existing-home sales fell 5.4% in June.In trading Wednesday several homebuilding firms saw their stock prices decline. KB Home was down 3% with Ryland Homes and D.R. Horton falling by 2% each.

This is a report from publicly available data sources and information provided to the SEC.

Home Ownership Rate Forecast

The U.S. home ownership rate stands at a 15-year low with the latest figures showing 65.6 percent of Americans living in owner-occupied homes.  At peak in 2004 the ownership rate was a hair shy of 70 percent.  Over the next two years it may fall further, possibly to 64 percent before stabilizing.  But the falling homeownership rate will not mean fewer home sales.  The dynamics is such that both the rental and ownership households will rise, though the proportion will be such that the home ownership rate will fall.
Ownership over the years (US)
Though ownership and rental demand at first appear to be a trade-off in most years, the net number of homeowners and renters also rises simultaneously in most years.  It is a natural outgrowth of about 3 million additional people living in the country each year, which generally leads to about 1.1 to 1.3 million net new household formations each year.  From the 1960s on, the number of home-owning households rose on average by about one million each year while the number of rental households rose by 300,000 to 400,000.  In some years, there are distinct tradeoffs between owning and renting with one rising while the other falls.  The starkest example of this are the years since the housing bubble crashed.  The number of homeowners fell from 2005 to today while the number of renters rose quite significantly.  The key reason for this prolonged multiyear trade-off development arose because of a sharp slowdown in household formation.  Household formation in the past 5 years has been only the half the normal rate.  It is understandable, given the difficult economic conditions of the past several years, for many young adults to move into their parents’ home or find extra roommates to share the living costs.  But a return to normal household formation will finally mean a rise in the net new numbers of homeowners and renters, as has been historically the case.  In a more optimistic scenario, if the household formation burst out in order to compensate for the prolonged suppression, to say something like 1.5 million annually over the next few years, then the increase in net new homeowners and net new renters could both be higher than their historic average gains.

This article was forwarded to us be someone in the industry and didnt have a source to quote from. PrivoCorp does not claim ownership of the article and regrets the inability to provide the source. However, it does seem like the article has made reasonable assumptions which are true and can only be an indicator of things to come. One thing is that the article does not provide any information on what the home ownership rates will "stabilize" to. This would be helpful in making some meaningful projections. Either way, this could only be beneficial for a contract mortgage processing company like Privo Corporation!