Credit Flows to Housing Market Yet to Turn Positive

    Ground zero for the Great Recession of 2008-2009 was the housing

market and mortgage market. The house price collapse and the

drying up of transaction volumes are generally well understood, but

what about credit flows to this important sector of the economy?

The net flow of mortgage funds hit zero by the second quarter of

2008, just two quarters into the recession. At the time, most analysts

still did not believe that there was even a recession under way; but

by that time, the data were consistent with the onset of a recession.

From then on, net mortgage flows turned negative, and they have

yet to turn positive in a sustained way. Briefly during the third-quarter

2013, net mortgage flows were positive, only to turn negative again

during the fourth quarter. We note that gross residential mortgage flows

have decelerated sharply, largely because of the steep decline in

originations for refinancing existing mortgages. More important for the

health of the housing sector are net flows. A refinanced mortgage leaves

the net flow unchanged, so whether the flow for refinancings is large or

small, the net is unchanged. Again, what the housing market needs to

support healthy conditions is a sustained increase in the net flows to

the sector.

    In no way can the net credit flow to this important sector be

described as normal. Effectively, the flow of mortgage credit has

not only slowed down, it has actually declined (because chargeoffs

and amortization have outpaced originations). Until net

residential mortgage credit flows turn positive in a sustained way,

the housing market recovery will remain in low gear. Currently, low

inventory and pent-up demand from years of deferring purchases

have produced what looks like a healthy housing market. But

with net mortgage credit flows near zero, a sustained recovery

in market conditions cannot take place. This is a big part of the

reason that the spring selling season so far is off to a slow start.

Although demand fundamentals are good otherwise, a weak flow

of mortgage credit is constraining the market.

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Four Reasons to Buy Your Home Now

1. Prices Will Continue to Rise

The Home Price Expectation Survey polls a distinguished panel of over 100 economists, investment strategists, and housing market analysts. Their most recent report projects appreciation in home values over the next five years to be between 30.8% (most optimistic) and 9.4% (most pessimistic).

The bottom in home prices has come and gone. Home values will continue to appreciate for years. Waiting no longer makes sense.

2. Mortgage Interest Rates Are Increasing

Although Freddie Mac’s Primary Mortgage Market Survey shows that interest rates for a 30-year mortgage have softened recently, most experts predict that they will begin to rise later this year. The Mortgage Bankers Association, Fannie Mae, Freddie Mac, and the National Association of Realtors are in unison; projecting that rates will be up almost a full percentage point by the end of next year.

An increase in rates will impact YOUR monthly mortgage payment. Your housing expense will be more a year from now if a mortgage is necessary to purchase your next home.

3. Either Way, You are Paying a Mortgage

As a recent paper from the Joint Center for Housing Studies at Harvard University explains:

“Households must consume housing whether they own or rent. Not even accounting for more favorable tax treatment of owning, homeowners pay debt service to pay down their own principal while households that rent pay down the principal of a landlord plus a rate of return. That’s yet another reason owning often does—as Americans intuit—end up making more financial sense than renting.”

4. It’s Time to Move On with Your Life

The ‘cost’ of a home is determined by two major components: the price of the home and the current mortgage rate. It appears that both are on the rise.

But, what if they weren’t? Would you wait?

Look at the actual reason you are buying and decide whether it is worth waiting. Whether you want to have a great place for your children to grow up, you want your family to be safer, or you just want to have control over renovations, maybe it is time to buy.

If the right thing for you and your family is to purchase a home this year, buying sooner rather than later could lead to substantial savings.

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