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.
