Bankers’ Hours column: Changes coming to the housing market
This is an issue we revisit periodically, because everybody else does.
The question is regularly raised, “With stratospherically spiking home prices, and so called ‘Non-QM (Nonqualifying mortgages, meaning not conforming to Fannie Mae or Freddie Mac guidelines) home loans’ making a comeback, are we headed for 2008 all over again.”
A lot of folks, much smarter than I, predict that we are. They cite runaway increases in sales price, year to year, and even month to month. They mention “Bank Statement” borrower qualifying, i.e. the use of, say, six months’ worth of checking account records as opposed to securing employment verifications or tax returns. And they also cite the proliferation of high ratio (90% of value) conventional mortgages.
When asked about the housing shortage as a factor in the stunning home price increases over the past three or four years, they readily agree that supply and demand is a major determinant, but they note that inventory is rising as mortgage rates increase, and the supply/demand ratio will ultimately even out.
My bet is that a return to the Great Meltdown is exceedingly unlikely, but that’s my bet. Don’t follow suit, because I’m notoriously bad at predictions. As noted, the doomsters have way more bulbs in the chandelier than I. Still, I have a secret super-power that they don’t: memory.
In 1961, I got out of military service and desperately needed a job, so I took what was offered, which happened to be a loan processor for a very active Denver mortgage banking firm. I knew less than nothing about mortgage lending, but I found it fascinating. It didn’t take long to get a picture of post-World War II mortgage finance. The housing industry, which quickly became one of the nation’s largest after 1945, was driven by high ratio loans, FHA (Federal Housing Administration) and the VA (Veterans Administration). The former agency’s required down payment was around 3% of the sales price; that of the VA was zilch. No vast wave of foreclosures, no Great Meltdown, resulted from those high ratio loans, mainly because of strong underwriting guidelines.
One posited harbinger of current disaster has been recent sharp increases in unsold inventory in certain markets, Denver among them. However, this inventory figure relates mostly to existing homes. New construction isn’t a major factor, mainly because there’s very little retail building going on; almost all of it is custom business. My first two jobs were with mortgage bankers, and the third with a savings and loan. Clearly, the business model of all three involved making home loans, and 50% to 70% of that business was financing builder sales. Today, in most markets, and certainly in Colorado, home financing means lending on an existing home. Of course, there are some spec homes being built, but that’s custom business.
In my first gig, it wasn’t uncommon for me to take four or more loan applications per day, all FHA or VA, and there were a couple of other people in the shop doing the same thing. Then, the S&Ls in town, and there were quite a few, did the deals that didn’t fit FHA or VA. The big ones flashed the cash for the luxury locations: Cherry Hill, the Denver Country Club venue, and Bow Mar. The mortgage bankers financed communities, the urbanization of farmland from Westminster and Thornton to west Denver, from Lakewood to Aurora.
The big difference between then and now is the disparity between disposable income and the cost of housing. From 1960 to the early ’70s, home loan appreciation was minimal. Buying a home wasn’t an investment, it was an acquisition of shelter with certain economic advantages over renting. I got into the business at the end of the so-called “Eisenhower Recession.” Nationwide, home sales were robust as population centers, especially in the west, doubled and tripled, but home prices stayed stable because supply and demand were mostly in balance.
Our family bought our first home by assuming an FHA loan and financing the difference with a second mortgage carried by the Realtor who sold us the property. We bought the second home with a new FHA mortgage (and a 3% down payment) and the third with a VA guaranteed loan (no money down). We didn’t put much money down because we didn’t have it. Clearly, not a lot of appreciation between 1962 and 1967.
Currently, there’s a lot more demand than there is supply, because wages and the cost of both existing housing and new construction aren’t in balance. There will be a downward adjustment in existing home prices, maybe a big one, in most markets, although not necessarily in some of Colorado’s resort locations.
New construction is probably another story. The high cost of land, and its development, along with expensive materials and labor, seem to go beyond just good, old-fashioned inflation. Rather, these costs are hard and real, and may be around for a very long time.
So loan qualifying isn’t as easy today as mortgage originators would like us to believe, 90% loans aren’t automatically bad deals, and there are a lot of people out there that want, and need, homes. So there won’t be a reprise of September 2008.
But the mossbacks like me, and the much brighter MBAs, can agree on one thing: There’ll be some big changes in housing in the U.S.A., and you can take that one to the bank.
If you can just figure out what the changes are.
Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His email is email@example.com.
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