The Ground is Shifting in the Housing Sector

Recently released statistics suggest that the housing market is showing a peculiar phenomenon that is seemingly contradictory.  Unemployment and loan forbearances are at all-time highs, and the country is in what many experts consider a significant recession with a lengthy recovery ahead, yet home purchases are at record levels.

Consider these seemingly contradictory figures:

  • Projections are down:  Fannie Mae projects that home sales will fall by nearly 15% in 2020 based on its April Housing Forecast.  Driving that decline will be a downturn in existing home sales, which Fannie Mae expects will drop to an annual rate of 4.54 million units, down from 5.34 million in 2019.
  • Performance is up:  On June 16, 2020, The Mortgage Bankers Association reported that the seasonally adjusted estimate of single-family home sales for May is an increase of 26.1 percent from the April pace of 533,000 units.  On an unadjusted basis, MBA estimates that there were 65,000 new home sales in May 2020, an increase of 27.5 percent from 51,000 new home sales in April.  Data for May 2020 shows mortgage applications for new home purchases increased 10.9 percent compared from a year ago. Compared to April 2020, applications increased by 26 percent.  This change does not include any adjustment for typical seasonal patterns.

Some industry observers suggest the strength in the home purchase market is due to pent up demand and historically low interest rates.  Others see a hoard of lemmings rushing toward a cliff.

And the storm clouds gather on the horizon.

  • Delinquencies are up:  Black Knight reported that mortgage delinquencies increased another 20 percent in May to hit the highest level since 2011.  Serious delinquencies have risen more than 50 percent over the past two months since April 2020.
  • Forbearances continue to rise:  There are now 4.3 million homeowners past due on their mortgages or in active foreclosure, including those in forbearance who have missed scheduled payments as part of their plans.  This is an increase of 2.3 million compared to March.
  • Unemployment is ticking:  The 4.1 million borrowers who are in forbearance now will eventually no longer be protected by the moratoria.  Research predicts that about 32 to 42 percent of the jobs lost during the past three months will be permanent, leaving a considerable number of borrowers in a precarious position for resuming debt payments.  No one knows exactly how many borrowers will not be able to resume working and paying.
  • Peculiar timing for a regulatory change:  Housing experts are predicting a significant wave of defaults and foreclosures while the CFPB is promoting a regulatory change that decouples a borrower’s ability to pay as measured by the traditional Debt to Income Ratio (DTI) in favor of “a price-based approach” as a condition for QM status under the General QM loan definition.