The next couple of quarters may be rough going for the housing and finance industry.
Housing prices and mortgage activity will stay highly sensitive to the Federal Reserve interest rate policy and guidance because of a weak job market, affordability challenges and the declining pool of first-time homebuyers.
Worse still, home price appreciation may level off and even dip into negative territory by the third quarter of 2014.
“Housing price appreciation (is) already on the decline, with only six cities in the Case-Shiller index showing strength in recent indexing – Dallas, Las Vegas, Miami, San Francisco, Tampa, and Washington,” says Tom Showalter, chief analytics officer at Digital Risk, which handles $8 billion in loan volume monthly. “Moreover, while home prices have increased, at least 25% of all homes are still under water.”
December home sales showed that 40% of sales were all cash – suggesting strong investor participation. Originations are also at a 14-year low.
“As investors leave market, there is little evidence that typical retail buyer will take up the slack,” Showalter said.
These issues have been compounded by the fact that “many banks and lenders are exiting mortgage lending as application rates hit ten year lows, complemented by increasing regulatory burdens and penalties, and increasing capital requirements. New Basel III regs now require 5% capital ratios for mortgage lending, a requirement that is largely punitive,” Showalter said. “The ultimate causes have nothing to do with the weather. Rather the issues are weak job market, flat consumer income and excessive regulation.”