Are we Watching an Inflection Point?

From the start of this pandemic, the performance of the housing market has been counter-intuitive.  While the country experiences record levels of unemployment not seen since the Great Depression, the housing market has continued to perform with robust mortgage loan originations.  Low mortgage rates have contributed to the surge in mortgage originations and constrained housing supply has contributed to continued price increases.  The industry is even warning of a potential bubble as prices surge during this unprecedented crisis.

We inspected the geographic markets where these mortgage originations are occurring to identify if they demonstrated stronger recovery and job growth relative to others.  We reviewed the Ginnie Mae loan-level data on FHA loans and identified that there were about 95,000 new originations in June 2020.  We found that 65% of these originations occurred in 14 states as shown in Figure 1 and that one in three loans originated were either in Texas, Florida, or California.  We also compared the year-over-year increase in origination volume and found that all 14 states experienced a surge of greater than 70% in loan originations compared to the volume in June 2019. 

Figure 1.

*FHA loans backed by GNMA originated in June 2020 as identified in GNMA’s most recent monthly loan-level data.

We then inspected these 14 states for their job growth and employment levels, as reported by the Bureau of Labor Statistics State and Metro Area Employment (SAE) data for June 2020.  Figure 2 shows the changes in employment levels for these 14 states (vertical axis) against the year-over-year increase in loan originations (horizontal axis).  Contrary to what would be expected, all 14 states show a positive correlation between decrease in employment levels and an increase in mortgage originations.  We organized the charts into four quadrants to identify the clusters of states that exhibited similar origination volumes and changes in employment levels.  Seven out of the 14 states show a significant increase in year-over-year loan origination volume while employment declined by 7 to 14 percent.

Figure 2.

By June 2020, the COVID-19 pandemic had taken a hold of the nation and the wave of borrowers seeking forbearance from their loan servicers was just beginning to show its potential magnitude as millions of GSE borrowers and FHA borrowers sought relief.  In Figure 3, we inspect the 14 states for their COVID-related forbearance activity.  We found that at least one in ten loans in each of these states was in forbearance in June 2020.  The high forbearance rates in these areas align with the conventional wisdom regarding the decline in employment levels that these states are experiencing. 

Figure 3.

What could be happening here?  One possible explanation is that what we are seeing in June is an inflection point where home sales, loan closings, and securitizations reflect the real estate activity before mid-March (or pre-pandemic).  Homebuyers who entered the market in mid-March went through the loan closing process in June.  We suspect that the origination volumes in July and August will slow down as the changes brought about by the pandemic-dominated timeframe (i.e., post mid-March) are reflected in the real estate market.

SP Group continues to monitor the originations, delinquencies, and forbearance activity in the housing market. SP Group is a Washington D.C. based housing finance and portfolio management consulting firm serving private sector and government clients.  For more information, please contact us.