Joe Murin: Does Limited Housing Inventory Mean the Beginning of the End of Housing Boom…or End of the Beginning?
Joe Murin is Chairman of JJAM Financial Services, Pittsburgh, Pa., which he founded in 2014. He previously served as Chairman of Chrysalis Holdings LLC and as CEO of ANC Holdings LP. Before that, he was Vice Chairman of The Collingwood Group and served as President of Ginnie Mae during the Obama Administration.
The post-refi boom world may still be taking shape, but it’s definitely upon us. There’s still a fair amount of uncertainty as to what it will look like in six months or a year. Industry conversations right now focus on a significant shortage of housing inventory as well as an inadequate rate of housing starts to meet an erupting demand. Home values are amazingly high nationwide. Are those values sustainable? The spiraling cost of building materials doesn’t bode well for builders. And we can never be too certain whether or not interest rates will begin to climb…and, if so, how much and when. There are a number of other variables still to be determined such as the angle of the economic recovery, the possibility of inflation and more. It is not completely unreasonable to think the mortgage origination sector may be entering a period of decline after 18 months of record prosperity.
Yet now is not the time for doomsaying. 2020 is over, and 2021 is shaping up to be a strong year as well, even if not in terms of overall origination volume. Then again, it would be a little unreasonable to expect a repeat of last year’s historic numbers. We are entering what may be one of the better purchase markets we’ve seen in quite some time. While that will mean some consolidation and some level of margin compression, those who are prepared will prosper.
Let’s start with the major variables of concern. We are at a unique point in history. There is no denying that America is, by and large, facing an inventory shortage, for any number of reasons. The behemoth Millennial generation we’ve long waited for to enter the market has begun to do so with a vengeance. Housing starts are, right now, not compatible with market demand. This too is understandable when one considers that badly disrupted supply chains have driven the cost of building materials to cringeworthy heights.
It is also very well documented that the refinance boom of 2020 is highly unlikely to continue, as much as we’d like it to. Too many factors are dictating that the days of the 2.6 percent fixed rate mortgage are probably over, which will dull demand. Additionally, even the sheer number of people who took advantage of ridiculously low refinance rates in 2020 thinned that market. We’re already starting to see the proof of concept. The share of refinances in mortgage origination volume dipped below 50% for the first time in 15 months in March, according to Black Knight‘s March data report.
In spite of a few dark clouds on the horizon, there are many reasons for optimism. We can start by looking at the flip side of the coin with regard to stratospheric home values. Even though that number is the direct result of low rates and record demand, the clear byproduct is increased home equity for homeowners. Now, consider the likelihood that a significant number of existing homeowners will be relocating post-pandemic, be it as they age and seek to downsize; flee heavily populated areas for the exurbs or even seek to “upsize” to accommodate home offices as the work-from-home phenomenon becomes more entrenched. In fact, this may have already started, as Real Trends suggests 2020 saw the beginnings of a new Great Migration to the suburbs or other regions from northeastern urban locations. Most existing homeowners poised to relocate in 2021, whether they refinanced or not, will benefit from the stunning increase of home value in such a short period. That will likely mean more home sales, regardless of the rate. Zillow economists concur, reporting they expect an increase of 7 million home sales in 2021.
There’s also the oft-neglected element of consumer confidence. A recent Mckinnsey & Company survey leans with “cautious optimism” toward a “spend recovery.” In other words, there may still be a lot of pent up demand that was suppressed by the virtual lockdown of the pandemic. While that demand is more likely to express itself in the hospitality or consumer good sectors, that confidence also suggests that America’s demand for new homes will not be blunted by financially driven hesitance.
Then, there are interest rates. One doesn’t need numbers to know that we have entered a semi-permanent era of what used to be referred to as “quantitative easing.” There is little political will on either side of the aisle inside the Beltway to be the party that shuts the doors on low interest rates. Inflation, you say? Yes. It is a real consideration. But without making this a macroeconomic white paper, I will simply say that I believe the Powers That Be will show considerable restraint on raising rates until it is absolutely necessary. For at least the next nine to twelve months, that means borrowing money to buy a home will cost the consumer considerably less than it has through most of history.
Finally, while homebuilders will likely continue to feel the pain on the supply side for some side, we can hope this will lead to innovation and improvement in supply chain strategy and management. In the meantime, homebuilders are not unaware of the incredible demand—and opportunity—facing them. I believe they will trust the Invisible Hand enough to pass along their increased costs to a consumer all too willing and able to pay them until the balance shifts again. Demand can trump many things for a business sizing up its market.
In sizing up the rest of 2021 for the home financing industry, the bottom line is that opportunity will withstand any headwinds. Many of the key indicators suggest that, while the market will be very different than 2020, an unusual confluence of demand, home value, (still) cheap money and, above all, opportunity will win out over the naysayers.
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