Experts anticipate the housing finance industry will experience shifts in 2015, most notably in the form of rising borrowing costs and gradually appreciating property values – particularly in the markets that didn’t see significant price gains this past year. But one thing – the level of regulation faced by most lenders – appears unlikely to change anytime soon.
As a recent Fortune Magazine report highlighted, even experts such as David Blitzer, chairman of the Standard & Poor’s Index Committee, are uncertain as to what the market holds in 2015. During a recent public panel discussion, Blitzer described the short-term outlook as, in a word, “mysterious,” noting that the so-called rebound effect will no longer singlehandedly drive home price gains consistently upward, month by month. Instead, the market’s short-term growth and long-term health will be contingent upon generating consistent and diverse homebuying activity. The catch there is that many mortgage lenders are still subject to compliance demands mandated by the Consumer Financial Protection Bureau and the now one-year-old Qualified Mortgage rule. Those measures have kept mortgage credit availability tight, and as long as standard home loan qualification remains difficult to come by for the average borrower, the market will continue to fall short of achieving its full growth potential.
A youthful influx
Home prices, specifically, figure to be dictated in the near term by macroeconomic indicators, such as population and wage growth. The labor sector exhibited gradual improvement throughout 2014 in terms of the number of jobs added by employers, with the national unemployment rate falling to 5.8 percent through November, but wages have increased only modestly. Meanwhile, according to the U.S. Census Bureau, 23-year-olds represent the largest subset of the country’s current population, indicating a surge in new homebuying demand could be arriving – if they’re eligible. Many homeowners of the baby boomer generation will be looking to downsize as they transition toward retirement over the next decade, creating a potential market void. In the past, the younger generation of buyers would have naturally filled the gap, but QM and other self-imposed standards for credit approval are combining to complicate the matter.
“Improving the national rate of homeownership hinges on getting more younger buyers eligible.”
Still, Jonathan Smoke, chief economist for realtor.com, expects 2015 to be the first of many years in which the millennial generation will make its presence felt in terms of home sales. Particularly in more affordable areas such as the Midwest and the South, where appreciation has been slower to take hold, Smoke believes Generation Y will “drive two-thirds of household formation over the next five years.”
Of course, that prognosis assumes to some extent that millennials will seek housing options in such markets, and if early activity is any indication, that’s not necessarily the case. Younger buyers have displayed a general affinity for living in larger metro areas, many of which are short on inventory and therefore generally less affordable. It’s a dilemma Jed Kolko, chief economist at Trulia, has referred to as the “millennial mismatch.” Improving the national rate of homeownership hinges on getting more younger buyers eligible, first and foremost, but it’s also dependent on affordability. Especially if mortgage rates rise over the next year as expected, price gains will need to ease in order for city-dwelling millennials to be able to invigorate home sales rates.
Rising rates, shifting dynamics
The Federal Reserve’s bond-buying program has officially concluded, meaning the central bank is in the process of normalizing its monetary policy. That normalization will eventually include the adjustment of the key federal funds rate, which will presumably trigger rises in consumer borrowing costs, as well. Smoke is among a number of economists calling for the average 30-year fixed-rate mortgage to reach 5 percent in 2015, thereby compromising affordability somewhat for buyers – especially those in urban markets with tighter inventory.
The answer, if home price gains continue and interest rates do indeed rise, might be for the new influx of buyers to continue seeking alternative avenues to homeownership. Many younger Americans are dealing with considerable debt from student loans, among other expenses, and therefore have had difficulty qualifying for traditional mortgage loans amid post-recession regulations. Companies such as Impac Mortgage Corp. Retail have been addressing that market need with AltQM™ products, which are designed for the near-miss borrower whose credit profile or income documentation doesn’t quite meet QM standards.
“We believe there is an underserved market for these products where certain borrowers are finding financing for purchase or refinance is either non-existent or available with stringent and costly parameters,” Bill Ashmore, president of Impac Mortgage Holdings, told HousingWire after the release of his company’s latest alternative products.
Given the other market factors at play, an expanding alternatives space would seem a logical solution to the “millennial mismatch” situation. Regardless of where they want to buy, younger consumers will need to attain qualification, and AltQM™ products cater to that exact need.
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