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Low rates mitigating housing-affordability woes, economist says

Last year, the title company First American Corp. began surveying title agents each quarter to gauge optimism in the mortgage market. In the fourth quarter of 2015, the agents grew more pessimistic overall, concerned about rising rates and home affordability. First American Chief Economist Mark Fleming spoke with Scotsman Guide News about the survey’s recent findings and offered his thoughts on where the market is headed.

Broadly speaking, have title agents been optimistic about the mortgage market in recent surveys?

Mark FlemingYes, well, they are voicing through their sentiment responses that there is going to be a shift from the refinance side of the fence to the purchase side. They have been consistently saying that they are more optimistic about the purchase market than the refinance market.

As an economist, do you agree with the sentiment expressed by the title agents that rising home prices will hamper home sales this year and that refinancing will inevitably decline after several strong years?

Their price expectations, at least for residential properties, is 5.5 percent [growth] for the coming year, which is quite in line with what many of the current economic forecasters are saying house prices will do and directly in line with what they have already done in the past year.

What the respondents are telling us through the survey is that we will see a future in which rates go up modestly, in which prices continue to grow at a relatively robust clip certainly relative to income growth and, therefore, we are concerned about the risk of affordability crunching the market. That is in line with what many economists are certainly saying. These are experts in the housing market. If we source their expectation, my hope is that as a leading indicator they might in fact get it quite right. Time will tell.

Why are home prices still going up at a robust rate?

This is where I will inject my opinion as an economist. It is one thing to say affordability will decline as prices and rates rise, but affordability is still better than it has been than in most of recent history in housing. Yes, affordability is declining, but it will not necessarily have a significant impact on people’s ability to purchase homes.

As to why home prices are rising,  I would point directly at low interest rates. Even if my income doesn’t grow, the lower the mortgage rate, the more I can leverage that income into a bigger mortgage. The bigger mortgage I can get, the more I can bid on a home. As long as mortgage rates remain low, it is allowing us to leverage our income into quite large loan amounts that allow us to bid and win.

Do you expect that home sales will be strong this year and take over the lion’s share of mortgage activity?

If this [low-rate] environment, which is really more driven by world events and the Treasury rate being driven down by global economic uncertainty, fades away and the Treasury yields go up and, consequently, mortgage rates go up, yes, refinances will dry up and the purchase market will become a more dominant force.

There is an interesting dynamic in play, which makes this not quite so straight forward. The same dynamic that deters people from refinancing, that puts them out of the money, also deters existing home owners from offering up their houses for sale. If I have a 3.5 or 3.75 percent, 30-year-fixed mortgage today, and a year from today, mortgage rates are closer to 5 [percent], it would cost me more on a monthly basis in terms of servicing the debt to get exactly the same loan amount that I already have. There is a disincentive not only to refinance, but also a disincentive to sell your home as rates rise. Many homeowners have locked in these amazing rates, and so it creates an environment where I expect there could be relatively tight inventories and, therefore, upward pressure on prices.  

Assuming that interest rates stay down for several months, is there still an untapped market for refinances given the massive number of people who have already refinanced?

The empirical economist in me says no, that these folks should have refinanced by now. We have probably gone on for a two-year period of rates basically stuck around 4 percent or better. We have bounced along the bottom here. Why haven’t you refinanced already? If you haven’t, then there must be something else that is preventing you from doing it. Having said that, I look at the data, and they keep coming  out of the woodwork. Somehow or another, we are still seeing a fair amount of refinance activity, which is counterintuitive. The economist in me says that refi burnout should be kicking in. Refinancing should be fading out quite quickly at this point but, for whatever reason, the empirical data that the Mortgage Bankers Association puts out seems to indicate that it is not. So, I am flummoxed about this one actually.  



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