Housing inventory crisis continues in 2022

Housing inventory crisis continues in 2022

Early in 2021, when I was talking about how people should worry about home prices overheating, I had a glimmer of hope that maybe toward the end of 2021 we would be spared another seasonal collapse of inventory. Inventory always falls in the fall and winter, but I hoped it wouldn’t be a repeat of 2020.

Unfortunately, that didn’t happen and recent data shows that we are at fresh new all-time lows in housing inventory, with mortgage rates and the unemployment rate both under 4% currently.

Houston, we have a problem.

I have always been mindful that the years 2020-2024 have the potential for unhealthy home-price growth, but now that we are entering year three of this unique five-year period, it’s time to see when mother economics will give us clues about when this madness with meager inventory will end. We are in the middle of January 2022 and spring selling season isn’t too far away. I don’t believe any of us want 2023 to start off with new fresh all-time lows in inventory.

Mortgage demand needs to slow down

A big theme of my work here at HousingWire has been to show you that since 2014 purchase application data has been rising just as total inventory has been slowly moving lower. Demand is growing and stable, excluding the COVID-19 pause. Unfortunately, we need to see weakness in demand for inventory to rise and get into a range that I am 100% rooting for, between 1.52- 1.93 million. This level, while historically still low, will mean the days on market will go higher, and this will give people choices.

Here are two charts from the National Association of Realtors that will show that homes simply come off the market too fast to give housing a breather.

This data comes from the recent existing home sales report which has been outperforming lately.

The best way to track whether mortgage demand is slowing down is to look at the MBA mortgage purchase application data from the second week of January to the first week of May. Typically, this data line falls in volume past May, so February to April are the real key months to focus on.

For some perspective, you really only want to look at the year-over-year data with this data line and also realize that we are still dealing with COVID-19 comps until mid-February: after that, we should be fine on a year-over-year basis. For example, today, purchase application data is down 17% year over year and has been showing negative year-over-year trends since the middle of 2021. However, once you make COVID-19 adjustments, the demand was stable in 2021 and picked up toward the end of the year.

My 2022 existing home sales range is lower than what we are currently trending at: I am looking for a sale range between 5.74 million and 6.16 million.

If housing is really getting softer, you will see year-over-year declines of 15%-30% in this data line. We had this happen only two times in the past eight years excluding the recent data that need COVID-19 adjustments.

In 2014, purchase application data on-trend was down 20% year over year because rates had spiked up higher in the second half of 2013. We saw softness in housing toward the second half of 2013 as well. Total inventory levels rose in 2014 and adjusting to population, that was the lowest level in MBA purchase application data ever. Still, with that slowdown in demand, monthly supply never broke above six months. However, the rate of price growth cooled down and days on market grew.

Higher rates created balance in the marketplace in 2013-2014 and also in 2018-2019. While I do believe the rate of growth of home prices are cooling, it’s still well above my comfort zone for the years 2020-2024. I don’t want it to seem like I am rooting against housing, I just would like to see more balance in the marketplace. There is a reason I was warning about home price growth with inventory and mortgage rates low amid stable demand.

In 2020, for about six weeks purchase application data took a dive as Americans were pausing due to the first experience of COVID-19. Back then people took their homes off the market so the inventory data didn’t move too much higher outside a brief increase as people realized the world wasn’t ending. We had purchase application data down over 30% year over year, which took sales down as buying paused. However, sales shot right back up higher, quickly.

So, for 2022, you want to keep an eye on the year-over-year data, especially past mid-February toward April. If you see year-over-year declines in the data, then the days on market should grow. I am not talking about 5% – 8% year-over-year declines, I am talking more like 15%-30% year-over-year declines after COVID-19 adjustments are made. When it really matters, this data line will show you double-digit percentage moves both positive and negative. If you’re looking for balance like I am, this is where you want to look. This data line looks out 30-90 days as well, so you get the picture: the critical time for this data line is coming up in 2022.

Don’t spend too much time on mortgage credit getting looser or tighterOne area that you don’t need to focus too much on is mortgage credit availability. I know many housing bears had hoped that credit getting tighter in 2020 and 2021 would crash the housing market. However, credit is very liberal today, as it always has been. However, since we’ve had no exotic loan debt structure post-2010, credit looking tight on paper just doesn’t have the same impact as it did from 2005-2009. At that time sales were declining from a high level and credit was getting very tight from the standards that facilitated the demand from 2002-2005.

From the chart below, it looks like credit got very tight from the start of COVID-19 and not much has been happening after that. In reality, most loans in America were basic vanilla 30-year fixed loans, and credit flowed for the most part during the COVID-19 crisis and recovery, all the way from 2021 to 2022. So if credit availability grows or declines, it’s only on the marginal loan products that are being used to buy primary residence homes. This isn’t like the peak of the housing bubble where 35% of the loans that were being done were ARM products. That number is below 5% now, so you don’t need to worry about the 30-year fixed loan being shut down. Or you don’t need to concern yourself that exotic loan debt products are coming back into the system pushing credit availability up

From the MBA:

Lastly, it falls back on the bond market

As you can probably tell from my writing, I believe and love a balanced housing market. What we have currently isn’t a balanced market. I really didn’t need to worry about this from 2008-2019, because I never believed we had the demographic demand to push total sales over 6.2 million to drive inventory levels to such low levels.

Well, that isn’t the case in the years 2020-2024, hence why I have always separated these two periods: from 2008-2019 and then from 2020-2024. With that said, in the past, higher mortgage rates, while never crashing the existing home sales market, have been able to cool things down and create more days on the market. The only problem is that this will require the 10-year yield to break over 1.94% and keep rising with some duration. This obviously hasn’t happened and this hasn’t been part of my forecast in 2021 or 2022. You can see why I am concerned.

Even with the hottest economic growth in decades, smoking hot inflation data — like we saw in the CPI report today — and all the talk about the Fed rate hike and taper, the 10-year yield currently right now is at 1.72%. Don’t forget, with the bond market, the trend is your friend, as I talked about in a recent article on jobs data.

What we know today is that we are starting 2022 spring at fresh new all-time lows in inventory for single family homes. Mike Simonsen, a friend from Altos Research creates weekly charts on the meager supply of inventory.

Here in Southern California, the amount of inventory in Los Angeles County is 4,432 homes, in Orange County it’s 954, and In San Diego it’s 1,254. Think about the millions of people who live in these areas and we are looking to start the year at 6,640 homes for sale.

Now, seasonality works both way. Inventory will pick up in the spring and summer and fade in fall and winter. However, as you can see, we are far from levels I would consider to be balanced, where days on market grow and people have choices. Since we are in year three of my five-year unique housing demographic period, demand being stable means getting the velocity of inventory to rise in a big way is difficult. The only way we can get some relief is if mortgage demand fades because that is the primary driver of housing demand. As we all know, the forbearance crash bros failed dramatically in 2021.

I would keep a close eye on mortgage demand, especially from mid February to April, to gauge whether mortgage demand is fading, which would allow days on market to grow. If this doesn’t happen, we are going to have another year of unhealthy home-price growth. Mother economics, she is a serial killer and will leave clues on what the economy is doing — the trick is always looking in the right spot. Remember, always be the detective, not the troll.

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CoreLogic leadership change: CEO Frank Martell resigns

CoreLogic leadership change: CEO Frank Martell resigns
It’s a new year, but CoreLogic is still undergoing big changes, the latest a resignation of its CEO, Frank Martell.

The Irvine, California-based housing data company announced Wednesday that Pat Dodd — a onetime executive at television ratings giant Nielson — will ascend from his position as chief operating officer and replace Martell as CEO on an interim basis.

Martell’s resignation comes nine months after private equity firms Stone Point Capital and Insight Partners purchased CoreLogic for $80 per share in cash, or roughly $6 billion. The deal ended CoreLogic’s position as a publicly traded company.

It also followed a bidding war for CoreLogic, with CoStar making a pitch only to issue an 11th hour withdrawal. CoStar CEO Andy Florance stated that the timing was poor to move into the residential mortgage market.

Martell joined CoreLogic in 2011 as the company’s chief financial officer. He took over as CEO in 2017 following the unexpected death of then-CEO Anand Nallathambi from an illness.

In a press release statement, Martell declared that he is “proud to have created significant shareholder value by leading the transformation of CoreLogic in the past decade into a scaled leader providing must-have data, platforms and analytics that power the residential housing ecosystem. With the company operating at record levels and with a deep and talented leadership bench in place, it is now time for me to step back from my operating role.”

Unclear is whether Dodd will become Martell’s permanent replacement. Messages left with Stone Point Capital and Insight Partners on Wednesday were not immediately returned. Chuck Davis, the CEO of Stone Point Capital, did note in a prepared statement, “Pat Dodd brings almost three decades of proven leadership and value creation in the information services industry.”

This includes a 28-year-run as a Nielsen executive where Dodd, according to his LinkedIn profile, worked in Geneva, Switzerland; Shanghai City, China and Toronto, Canada.

Dodd takes over a business that defines itself as “providing information intelligence to identify and manage growth opportunities, improve business performance, and manage risk” in “real estate, mortgage finance, insurance, the capital markets, or public sector.”

One thing CoreLogic is known for is gathering proprietary housing data to develop an algorithm that can value residential property. Some real estate industry observers praise CoreLogic for having one of the more precise automated valuation models.
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Guaranteed Rate closes Stearns wholesale channel

Guaranteed Rate closes Stearns wholesale channel
Chicago-based Guaranteed Rate will discontinue its third-party wholesale channel, Stearns Wholesale Lending, just one year after it acquired the multichannel lender.

“Guaranteed Rate will continue to thrive and win market share by having a laser focus on leveraging our industry-leading purchase platform augmented by the best loan officers in the business,” Guaranteed Rate CEO Victor Ciardelli wrote in an email to brokers that HousingWire reviewed.

To ensure success, the company “sometimes makes hard decisions,” but Guaranteed Rate’s leadership is committed to making what is already the best value for its customers, Ciardelli wrote. The email explained that the last day to register a loan is January 12, while the last day for closing a transaction is February 28.

Guaranteed Rate acquired Stearns Holdings in January 2021 for an undisclosed sum from the financial giant Blackstone Group, which also acquired a stake in Guaranteed Rate as part of the transaction. The year prior, Stearns originated $20 billion in loans.

HousingWire reported in 2021 that Stearns’ retail operations would be folded into Guaranteed Rate. Wholesale, JV and partnership businesses remained as stand-alone segments led by Stearns’ CEO David Schneider. Stearns had a sizable partnership business, led by Steve Stein, a more limited retail operation, and a wholesale channel that was the largest in the industry as recently as 2013, but had lost market share to UWM.

Founded in 2000 and known for its robust retail operations, Guaranteed Rate has been growing in stature in recent years. In acquiring Stearns, the company sought to boost retail loan originations, scale its JV platform, and develop new multichannel capabilities. HousingWire reported the acquisition would provide significant revenue for Guaranteed Rate to pursue a potential IPO.

Guaranteed Rate originated $90 billion from January to September 2021, an 81.8% increase compared to 2020, according to Inside Mortgage Finance. The volume puts the company as number eight among the top mortgage lenders in the country.

The company’s star loan officers have set origination records, explaining in part Ciardelli’s promise to invest and focus on the purchase platform its LOs use.

Massachusetts-based Shant Banosian, for example, said he had funded a whopping $2 billion in total origination volume from November 2020 to November 2021. The figure is believed to be a record for a retail loan originator. His colleague Ben Cohen, a loan officer from Illinois, eclipsed the $1 billion threshold in September 2021.
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FHFA’s loan-fee bump buoys PLS market

FHFA’s loan-fee bump buoys PLS market

The Federal Housing Finance Agency’s announcement last week that it will hike upfront fees for high-balance and second-home loans effective April 1 will provide a boost for the private-label securities market, according to executives at one of the leading sponsors of private-label securities.

In fact, FHFA’s new fee structure for government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac is expected to largely offset the effects of other recent policy changes that were projected to be a drag on the secondary market in 2022, according to Dashiell Robinson, president of Mill Valley, California-based Redwood Trust.

“We do view the announcement to be a constructive one for the non-agency market,” Robinson said. “The new pricing framework … should shift supply toward private market participants, like Redwood. 

“In today’s current market, we see private-label securitization execution for these [high-balance and second-home loan] products as more favorable than selling to the GSEs, which should only become more apparent.”

Redwood, through its Sequoia Mortgage Trust (SEMT) conduit, brought to the market a total of nine securitization deals in 2021 backed by 4,705 loans valued at nearly $4.2 billion, bond-rating agency records show. The first securitization deal of 2022 issued through Redwood’s Sequoia conduit (SEMT 2022-1) involved a loan pool of 751 mortgages valued at $687.2 million, a Kroll Bond Rating Agency report shows.

“Redwood, through our Sequoia program [as of year-end 2021] has securitized nearly $30 billion of high-balance loans, across 76 deals since 2008,” Robinson said. “We also distribute close to 50% of our production via whole loan sale to various insurance companies, asset managers and financial institutions — additional important sources of liquidity to the private sector.”

Chris Abate, Redwood’s CEO, added: “The FHFA’s announcement provides welcome additional alignment between private capital and the GSEs in furthering our collective goals for housing access and affordability. Redwood remains a highly complementary partner to the GSEs, and we view these changes to be constructive for non-agency origination volumes overall.”

That alignment, however, is subject to policy changes that bend and flex the relationship between agency and non-agency markets over time. The latest policy change for Fannie Mae and Freddie Mac will bump up loan-level origination fees for high-balance mortgages by between 0.25% and 0.75%, based on a tied loan-to-value schedule. For second-home mortgages, the tiered fees will increase between 1.125% and 3.875%.

Two other recent policy changes announced last year, though, were deemed negative for the private-label market because they were seen as pushing more mortgages and securitizations toward the GSE bucket. 

In November 2021, FHFA, which oversees the GSEs, announced it was bumping up conforming loan limits for 2022, with 95% of U.S counties being subject to a new baseline GSE loan-limit of $647,200, while some 100 high-cost counties will have conforming loan limits approaching $1 million. As the GSE loan-limit box expands, it takes loans away from the private market, loans that can be pooled for private-label securitizations. 

Likewise, a surge in private-label transactions and deal volume in 2021 was propelled initially, in part, by FHFA policy changes in January 2021 to the preferred stock purchase agreements (PSPAs) governing the GSEs. The key change was a cap placed on the GSEs’ acquisition of mortgages secured by second homes and investment properties. The private-label market boost from those changes was undone, however, by their suspension last September and are now under review by FHFA.

FHFA Acting Director Sandra Thompson, nominated by President Joe Biden to become the permanent director of the agency, appears to be listening to the private market’s concerns about GSE mission creep, at least when it comes to the question of affordable housing.

“Compared to previous years, the 2022 conforming loan limits represent a significant increase due to the historic house-price appreciation over the last year,” she said at the time the new loan limits were announced. “FHFA is actively evaluating the relationship between house-price growth and conforming loan limits, particularly as they relate to creating affordable and sustainable homeownership opportunities across all communities.” 

The recent decision by FHFA to beef up its upfront loan-pricing fees for high-cost and second-home loans starting in April appears to be delivering on that promise, given it expands resources available to the GSEs for addressing affordable-housing concerns while also widening the playing field for the non-agency market.

“For the industry, we expect the announcement to drive non-agency origination volumes higher, generally offsetting the projected decline from the higher conforming loan limits,” Robinson said. “We also believe that the new loan-level price adjustment for second homes is a logical surrogate for the prior cap as it provides additional subsidy in a more predictable pricing fashion for origination. 

“Overall, 2022 supply outlook industry-wide for non-agency RMBS [residential mortgage-backed securities] is positive.”

But what the government gives, it also can take away again in the future. “Ultimately, if the new policy remains that way for an extended period, you will see the private-sector step in and possibly create greater liquidity,” said Tom Piercy, managing director of Denver-based Incenter Mortgage Advisors. “But does it go the way of the second-home and investor-loan caps … six or nine months from now?”

But it’s not likely that a policy reversal on the GSE loan fees will be in the cards anytime soon, according to some industry observers, assuming Thompson’s confirmation hearing goes well for her this week and she is named the permanent director of FHFA. Those observers point out that the federal policy for the government controlled GSEs is guided by the administration in power.

The January 2021 changes to the PSPAs that capped the GSEs’ purchase of investor-property and second-home mortgages, for example, was a policy initiated under the Trump administration. The caps were suspended in September 2021 under the Biden administration. It is in that context that the upfront loan fees are now being boosted.

“While there have been many policy changes as of late for originators to digest, there are currently significant growth drivers for the industry,” Redwood’s Robinson said.  “[Those include] the move to the new qualified mortgage (“QM”) definition, anticipated growth in non-QM [mortgages] as originators look for more products to combat higher rates, and slight easing of the overcorrection in lending standards that occurred due to COVID, particularly as the economic recovery remains solid. 

“We have witnessed a number of recent and on-going examples of the strength and importance of the non-agency market, especially in addressing the evolving needs of the housing market,” Robinson added, “and we would expect that positive momentum for the industry across non-agency products to continue.”

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First American to acquire Mother Lode Holding Company

First American to acquire Mother Lode Holding Company
First American Financial Corporation, the second largest of the “Big Four” title insurers, announced plans to acquire Mother Lode Holding Company and its subsidiaries on Wednesday.

The financial terms of the deal were not disclosed, and the closing of the transaction is subject to regulatory approval.

Mother Lode Holding is a California-based provider of title insurance, underwriting and escrow services for residential and commercial real estate transactions with 92 offices in 11 states. Its 17 subsidiaries primarily operate in California, Idaho, Montana, Wyoming, Texas, Arizona, Washington and New Mexico, with its primary subsidiary being Placer Title Company.

“Mother Lode Holding Company’s reach, expertise and commitment to superior customer service aligns well with our existing operations and will augment our efforts to expand our coverage in key growth markets,” Dennis Gilmore, the CEO of First American, said in a statement. “With Mother Lode Holding Company and its subsidiaries, we will expand our ability to serve customers throughout many of the strongest housing markets in the U.S.”

This acquisition will increase First American’s footprint in 11 states. After the transaction closes, Mother Lode Holding and its subsidiaries will continue operating under their existing brands. In addition, Mother Lode Holding CEO Randy Bradley, COO Lisa Steele and president Darrick Blatnick will remain with the company and manage the day-to-day operations.

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So far, 2022 has been a busy year for mergers and acquisitions in the title insurance industry. The smallest of the “Big Four,” Stewart, has acquired Nashville-based Homeland Title and also a majority share in Houston-based Great American Title Company.

Like First American, Stewart is also investing in growing housing markets across the country, as it is looking to regain some of its market share. During the third quarter of 2021, Stewart’s market share was 8.2%. This is down from 9.6% at the end of 2020 and 10.6% at the close of 2019, according to the American Land Title Association.

During the third quarter of 2021, First American reported a net income of $445.3 million compared to $182.3 million during the same time period a year prior. Additionally, the company reported $2.1 billion in direct title revenue, up 21% from Q3 2020.
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Purchase loans drive mortgage applications higher

Purchase loans drive mortgage applications higher
Mortgage applications climbed 1.4% for the week ending Jan. 7, 2022, according to a survey published by the Mortgage Bankers Association this week. The growth was buoyed by a 2% increase in the trade group’s seasonally adjusted purchase index, the MBA said.

Per the report, the unadjusted purchase index increased 51% compared to the previous week but was 17% lower than the same week one year ago.

On the refinance front, the trade group’s refi index dipped by 0.1% from the previous week, coming in 50% lower than the same week one year ago.

Joel Kan, associate vice president of economic and industry forecasting at the MBA, said in a statement that the increase in mortgage rates is curtailing refinance activity.

“Mortgage rates increased significantly across all loan types last week as the Federal Reserve’s signaling of tighter policy ahead pushed U.S. Treasury yields higher,” Kan said. “Rates at these levels are quickly closing the door on refinance opportunities for many borrowers.”

As evidence, the report found that the refi share of mortgage activity fell to 64.1 % of total applications from 65.4% the previous week.

The trade group noted that refi applications are at their lowest level in over a month, while conventional refi applications were at their lowest level since January 2020.  

Adjustable-rate mortgage (ARM) share of activity dipped to 3.1 % of total loan applications.

Meanwhile, the share of total applications that made up FHA and VA loans grew to 9.9% and 11.4%, respectively. The USDA share of total applications remained unchanged from 0.4% the week prior, the MBA said.

The trade group remarked that it “expects solid growth in purchase activity this year, as demographic drivers and the strong economy support housing demand. However, the strength in growth will be dependent on housing inventory growing more rapidly to meet demand,” said Kan.

Here is a more detailed breakdown of this week’s mortgage applications data:

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances($647,200 or less) increased to 3.52% from 3.33%.

The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $647,200) increased to 3.42% from 3.31%.

The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA increased to 3.50% from 3.40%.

The average contract interest rate for 15-year fixed-rate mortgages increased to 2.73% from 2.60%.

The average contract interest rate for 5/1 ARMs increased to 3.03% from 2.45 percent%.
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