How's the Market?
When will the housing market ever return to full health? Market fluctuations make that a difficult question to answer with confidence.
Recent information from Black Knight (NYSE:BKFS) suggests that part of the reason for today's fluctuating market is due to opportunity, or lack thereof. Opposing market forces create opportunity for those with the means to act while limiting opportunity for others, resulting in a split housing market that defies a comprehensive definition.
Slower Growth is The New Norm
Overall, mortgage originations are down significantly. Black Knight's data for Q1 2017 show that mortgage originations dropped by just over one-third compared to the previous quarter, to $372 billion – representing the lowest number since Q4 2014. Data from the Mortgage Bankers Association (MBA) shows a similar drop to $361 billion, the lowest since Q1 2016 by their measure.
Compared to pre-recession figures, mortgage originations have been running low for years. Using MBA data, from Q4 2004 through Q1 2010, there was only one quarter below $361 billion – that was Q3 2008, as the housing crisis neared a trough. Mortgage originations in nine of the 24 fiscal quarters since that time were below $361 billion.
While it doesn't represent the full housing market, the long-term chart of existing home sales may illustrate the issue more clearly. It shows two recessionary declines, from the late 1970s through the early 1980s and during the course of the Great Recession. Trend lines can be roughly drawn through the variations to show sharp, unsustainable increases in the 4-5 years before recessions and slower, more sustainable increases during the recovery years. Our current trend line may be a bit lower than that of recovery periods, but not by much.
Market imbalances are slowly correcting themselves, as they always do. We are in a slower recovery than usual because the Great Recession created a greater imbalance than usual – thanks to combined market forces and policies designed to prevent a future overheated market.
It's All About Affordability
Today's imbalances are caused in part by a mismatch in supply and demand, with limited affordability in the important starter housing market. That will take time to correct, as builders are less motivated to build starter homes because of inherently smaller margins.
Limited supply in some segments is driving home prices up, leaving more buyers unable to take advantage of lower interest rates and the gradual loosening of credit. In the past quarter, the Black Knight Home Price Index topped its previous peak set in 2006 by 1.5%, thus leading Black Knight to conclude that home affordability "remains near a post-recession low."
With prices rising and interest rates following, consumers with superior credit scores have an even greater advantage than usual – especially with respect to refinancing.
No Thanks, We'll Wait
According to Black Knight, Q1 2017 refinance lending took the largest hit with a 45% overall drop over the previous quarter. Among those with credit scores of 740 and above, refinance volumes were cut in half.
Why such a sharp drop? Opportunity may be the reason again. Interest rates have been at or near historic lows for years, and many people who could afford to take advantage of refinancing have already done so. Homeowners with high credit scores may be able to wait for temporary dips in interest rates and take the best deal possible over a wider timeframe. Others may be forced to take whatever is available, and pay for that privilege – if they can.
Refinancing only makes sense when you can achieve an interest rate that allows you some advantage – resulting in lower monthly payments, shorter loan terms, or lower total costs over the life of the loan. Increasing interest rates make it less likely that you will be able to find such a deal. The Federal Reserve raised interest rates again during their June meeting, and have signaled more rate hikes to come – although the low unemployment rate has not resulted in the inflation risks economists expected.
Black Knight's initial estimate on May's mortgage data show the direct effect of interest rates. Prepayments, a typical indicator of refinancing activity, rose 23% from April's values, based on an easing of interest rates. Given the June rate increase, refinancing gains are likely to be neutralized by July's numbers.
In short, refinancing is likely to continue to fluctuate based on perceptions of short-term opportunities.
Like the mixed assessment of the national housing market, your take on your local housing market depends on your goals and opportunities. Consumers with fewer housing options in their price range and location are forced to make hard decisions given their options, and a low credit score amplifies their problems. Those with greater opportunities can afford to wait.
In either case, you can maximize the chances of success by keeping your credit score as high as possible. That means using credit wisely to show lenders that you are a low risk for default. Pay all bills on time, keep debt at low levels compared to your overall available credit, and regularly check your credit report for errors or fraudulent charges. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
You can't change either the national or the local housing market, but you can keep up with your local market and lending trends to spot favorable conditions for buying or refinancing. Know a good deal when you see one, and be in a financial position to take advantage of it. MoneyTips is happy to help you get free refinance quotes from top lenders.