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    February 16, 2021

    Why Can’t We Build Enough Homes to Meet Demand?

    By Mark Fleming and Odeta Kushi, First American Insights -- In this episode of the REconomy podcast from First American, Chief
    Economist Mark Fleming and Deputy Chief Economist Odeta Kushi discuss the headwinds home builders face as they try to ramp up
    new home construction amid today’s strong demand for housing and an historic housing supply shortage.

    Odeta Kushi: Hello, and welcome back to another episode of the REconomy podcast where we discuss economic issues that impact
    real estate, housing and affordability. I'm Odeta Kushi, deputy chief economist at First American and here with me is Mark Fleming,
    chief economist at First American Hi, Mark.

    Mark Fleming: Hi, Odeta.

    Odeta Kushi: Well, you've probably heard quite a bit about the housing supply shortage. And, if you haven't heard about the
    shortage, you may at least have noticed that house prices around you seems to be going higher and higher. Now, the main reason
    for that is a decade-long imbalance between housing supply and demand. So today, we'll be talking about some of the headwinds to
    building more homes. Let's just call them the four L's: labor, land, lumber, and laws. And we'll start with the first labor. Mark, what's the
    issue? Why can't we get more construction workers? Do we have enough construction workers? I guess, is the first question.

    Mark Fleming: I mean, we can't find enough construction workers because we actually need to build a lot more homes, even more
    than we have historically built in normal and good times. And that actually has to do with the fact that we've had a long decade of
    increased demand for not just home ownership, but shelter in general, all of the demographic demand from millennials over the last
    decade, forming new households, has driven up the demand not only for single family homes for people to own, but lots and lots of
    rental units. In fact, broadly speaking, demand for shelter has increased dramatically. At the same time, as you point out, the amount
    of construction is underperforming even normal levels, partially due to a lack of labor. You can think of it from a deficit and debt
    perspective. The debt is the total amount of accumulated deficits. For the last decade, we've been running deficits of not building
    enough each year to even keep up with the new demand for housing, add all those deficits up, and that creates a significant debt. So,
    the run rate of a million new homes built a year, that's just not enough. It's just not enough.

    Odeta Kushi: So we need to fill the deficit is what you're saying, and build our way.

    Mark Fleming: Build our way out of it.

    Odeta Kushi: Yeah, absolutely. And it seems like this will be an ongoing issue, because as we know, millennials continue to form
    households, and baby boomers are living longer than ever. And so we'll continue to form households. And it seems that new home
    building really needs to keep up the pace. And labor has been one of the major headwinds to building more homes, you need more
    construction workers in order to build more homes. And, as we recently found, if you look at the ratio of housing starts, so that's the
    number of new homes breaking ground, relative to construction employment, you know, prior to the pandemic, that was about 1.4
    starts per construction worker in the timer period between the Great Recession and just prior to the pandemic. But, before the Great
    Recession that ratio hovered at around two starts per worker. So pretty low in comparison.

    Mark Fleming: Wait, you're talking about the P word?

    Odeta Kushi: Productivity.

    Mark Fleming: Right. So, fancy ratios aside, the question we're trying to figure out here is, how many homes, can be built by a
    certain amount of workers? Oh yeah, remember my old 80s references in the last podcast? Remember the Tootsie Pop commercial?
    How many licks does it take to get to the center of a Tootsie Pop? It's something like that. How many workers do we need to build one
    house? That's about productivity. And hey, guess what? Has that really changed in the last 50 years? Think back to the middle of the
    20th century? How do we build a home, we brought a bunch of supplies to a site, a bunch of labor put this stuff in kind of the same
    way as today. In fact, where have the big enhancements been in terms of productivity? Well, there's things like the nail gun, that
    probably helps to some degree, but you still need a human to know where to point it. And so, we have this challenge of basically a
    lack of any significant productivity growth over the last half century or so in the housing sector. This is still an extremely labor-
    intensive industry space. It requires a lot of labor to build a house and that hasn't changed.

    Odeta Kushi: And that's a great point, Mark. It does not lend itself well to automation and outsourcing. So, the only way to build more
    homes is to bring more people to the job – more hammers, more homes.

    Mark Fleming: I gotta I gotta ask a question because you mentioned outsourcing. You mean, we can't outsource home building? Oh,
    that's right. It’s because I need the home built here, not somewhere else.

    Odeta Kushi: Exactly. It’s unique to the housing market that you can't do that. And so certainly the way to increase homebuilding is
    to bring more people to work. And, unfortunately, in the aftermath of the Great Recession, the construction industry lost a large
    number of workers. During the recession, the construction industry lost about one and a half million jobs. If you look at the pre-
    recession peak to the trough, it's over well over 2 million jobs. And, it's been very difficult to find workers to come back to the
    construction industry. And there's a couple of reasons for that. So one of the reasons is that millennials, the people that are entering
    the workforce, well, they're just not quite as interested in the construction industry. They want jobs that are less seasonal, less
    physical, and more in an office environment. And that's proving to be a challenge to the construction industry. Because again, they
    need to attract millennials to work in this field. The other reason is an aging workforce. A lot of those people that lost their jobs in the
    Great Recession, they retired, they were older, and they haven't been able to retain or get those workers back. So, it's been very
    difficult to attract new workers to this industry.

    Mark Fleming: Well, where would we typically have gotten those workers in times past?

    Odeta Kushi: Well, typically, in the past, I think right now, there's, there's a deep focus on getting that four-year degree moving away
    from the trades, and moving into college and office environments. And that's, unfortunately lends itself to difficulty finding construction

    Mark Fleming: Well, this is effectively the same dynamic that's at play more broadly across the across the economy in the sense that
    we're moving to being a more service sector-oriented economy and there are different levels of training to do those kinds of office
    jobs relative to manufacturing and construction jobs. As we pointed out, you know, with manufacturing, there's the opportunity to
    outsource it to other places to find the labor. With home construction, you can't outsource it. So you have to bring the labor to you, or
    back to my productivity comment, find a way to more efficiently utilize the labor that you have. And, you know, we had a little fun a few
    minutes ago with the idea that there had been no productivity enhancements. But now the pressure is on and we do see, because of
    this stress of not being able to find the labor to bring, the industry itself says, well, I need to find ways to increase productivity. Maybe
    the reason we didn't see that much productivity growth was there was no market pressure to make it happen until now. But modular
    homes – building components in factories and bringing them to the worksite. These are all things that are actively being experimented
    with today effectively to try and solve this problem – to increase the productivity of the labor because I can't simply add more labor.

    Odeta Kushi: That's a really great point and I think eventually that will revolutionize the way that homebuilding is done. But, right
    now, we still need to put more people to work and a lot of different dynamics going into that.

    Mark Fleming: Do you recall...

    Odeta Kushi: Yes.

    Mark Fleming: Do you recall or maybe you don't? Does anybody recall the old Sears and Roebuck catalogs. And in fact, at the turn
    of the 20th century, not the 21st century. So we're talking circa 1900s, early 1900s. You could buy a home in the Sears and Roebuck
    catalog. And they would build it modularly in a factory and bring it to you. And then you had to assemble it yourself. So in many ways,
    the question is, are we going back in time to Sears and Roebuck catalog era?

    Odeta Kushi: You know, these trends do have a way of coming back around, but this is another reference that went way over my
    head. That's okay, that's okay. And so clearly a lot of issues in attracting more labor at this time. But with the longer run goal of being
    able to be more productive in the construction industry, hopefully through use of technology. But and I'll just briefly mention this, it is
    quite important, but we won't spend a lot of time on it. There is the issue of migrant workers. That's something immigration policy
    certainly has a lot to do with. A lot of immigrants that come to the US work in the construction industry. And so that has a bearing on
    the labor force in this industry.

    Mark Fleming: That's not actually even construction industry specific. In fact, migration has played a major role throughout recent
    history in our economic productivity growth and our economic growth in general. In fact, the 80s and 90s we had a lot of migration for
    all kinds of industries. And that's one of the ways in which we've been able to grow. Growing GDP is a function of putting more people
    to work wherever you get them from, and putting each person more productively to work, you combine those two things in some way
    and that's how we get GDP growth.

    Odeta Kushi: That's a really great point. Because when you start to see women enter the workforce, you also see in the data, a big
    boost in GDP growth productivity and that's really a function of women entering the workforce in large, larger numbers than ever
    before. And you can see that in the numbers. So that's a good point, immigration is also incredibly important to overall GDP growth,
    not specifically just to the construction industry. So moving past the labor, let's touch a little bit on land, one of the issues…

    Mark Fleming: There's no land. I can't find any land.

    Odeta Kushi: You summed it up. That's basically the gist of it. There's a lack of available lots. Not just available lots, but a lack of
    affordable lots. And that's particularly acute in some of the most desirable locations. So let's think maybe San Francisco, maybe we
    think of Boston, not a lot of places for builders to build. And that obviously results in increased lot prices and a headwind to building
    more homes.

    Mark Fleming: We have to be a little bit more specific here. There's plenty of land in the United States of America. The problem is
    it's too far away from where we want to work and play. Interestingly, maybe that's a changing dynamic given the pandemic over the
    last year. But, what we did in the last half of the 20th century was basically expand suburbia, outside of the urban core, you know,
    think about all the big cities with all their inner and middle suburbs and areas like that. The GI Bill greatly expanded the suburban-
    urban landscape. Building was easy and inexpensive, because there was plenty of land that was in within reasonable commuting
    distance throughout the 50s, 60s and 70s. In fact, most major cities suburbs, you know, were built then. There was a big expansion,
    largely feeding and serving baby boomers at the time. Now, the challenge is either you infill develop, which is expensive, or you build
    on the urban or exurban fringe, but that's now pretty far away from most big cities, which reduces its desirability as a as a potential
    building site. Because do you really want to do that hour and a half commute back into Washington DC? Maybe not, unless you only
    have to do it two days a week. So I think one of the dynamics that might happen in over the next year or so is that the attractiveness
    of what used to be considered unattractive buildable land on the exurban fringe might now begin to look attractive from a builders
    perspective because our work and commute patterns may have changed more permanently post-pandemic.

    Odeta Kushi: That's a great point. And I think that's also why housing tends to go hand in hand with the subject of transportation.
    Because, if you want to build further out from the urban core where the jobs are located, you really need to have a supportive
    transportation system to get people to and from the city. But...

    Mark Fleming: Or a bigger road, just make the road bigger, keep on widening it, not a problem. Get the autonomous driving cars,
    easily solved.

    Odeta Kushi: Automated.

    Mark Fleming: Automated, that's right.

    Odeta Kushi: Yes. So obviously, lack of affordable lots another headwind, and then we move into lumber. But more generally, this is
    rising material costs, we're focusing on lumber, because there's been an increase in the cost of lumber. Since about the beginning of
    the pandemic, it has risen dramatically over the course of kind of the last six to eight months. And that really threatens homebuilder's
    momentum. And so there was a recent NHB study that showed that the higher lumber prices added nearly $16,000 to the cost of a
    typical new single-family home, and over $6,000 for multifamily. And that was since about mid-April 2020. So obviously, this is another
    kind of cost-prohibitive issue that builders are facing in the industry right now. But, that's alongside rising material costs in other areas
    as well.

    Mark Fleming: It's no surprise. Walk past your local home being built and you clearly see that there's a lot of lumber there. There's
    also a lot of waste of that lumber. And, again, as we talked earlier about the sort of the market driving the need to find productivity
    enhancements for labor, same thing here. If I can build the walls in a more efficient way with less waste, given the fact that my material
    costs are higher. There’s now more incentive to do it in a different way. And so again, the idea of modular manufacturing as a way to
    more efficiently use those expensive input resources, drives innovation, and I think that will continue if, a big if, if these construction
    input costs remain high.

    Odeta Kushi: Absolutely. So, there's a focus on efficiency as well. Efficiency, productivity. And then there’s the last of our four L’s,
    which is actually laws. And what we're referring to here is regulatory burdens. And this is regulatory burdens imposed at all levels of
    government. So national, state, local, making it harder and more expensive for builders to build. Now, for those of you listening, you
    may have heard a little bit in this last year about Oregon. Oregon was one of the first states to pass legislation to eliminate exclusive
    single-family zoning. And this is because Oregon is a state that is suffering from a lack of supply. They need to build more homes.
    And one of the headwinds that they're facing are regulatory burdens in the way of zoning laws. And so this is something that we find
    results in an increase in the final price of a home. Again, there was a study from the National Association of Builders that showed that
    government regulations accounted for over 24% of the final price of a new single-family home. This is a little more difficult to address
    and likely needs to be done at the local level, but one of the biggest headwinds, I think, to building more homes.

    Mark Fleming: Wait, not in my backyard. No.

    Odeta Kushi: The NIMBYs.

    Mark Fleming: And now, if anyone has paid attention, there are actually YIMBYs. Yes, in my backyard. So, an interesting dynamic,
    but you actually put your finger on it, and it relates back to the accessibility of land too. The ability to build has become significantly
    more expensive, as driven by regulatory zoning costs in general. And it varies very dramatically across the country. These are largely
    locally designed programs and locally implemented. And so actually, from a policy perspective, if we need to build more housing, it
    cannot be done at the federal level. It has to be done at the local level, because it's these regulatory and zoning restrictions that are
    making it more difficult to build, even though the demand is there, which is exacerbating our shortage problem. And one of the
    funniest things is, when you look at neighborhoods, and the degree or the level of regulatory costs that are involved at the local
    market level, it's correlated highly with income and homeownership. The higher the value of the homes, and the higher the
    homeownership rates, the more costly are the regulatory burdens to build in those neighborhoods. We like to say that the single
    largest special interest group in the United States is homeowners. Nearly two-thirds of all Americans are a member of this group. And
    it's homeowners that generally are very cautious about development happening in their neighborhoods, because it facilitates change.
    And change, it's often unclear whether it's going to be good or bad. There's a lot of that protectionism of your most important asset
    against the possibility of change in the form of development. Which is really the root cause of something that will not just persist in the
    short run, but will be a major theme in addressing a healthy housing market for years to come and that is how do we manage and
    balance all of these competing interests at the same time as providing enough shelter for all the people in this country who want it.

    Odeta Kushi: Just one of the basic universal human rights, right? I mean, you have to have a place to live, it doesn't necessarily
    need to be homeownership, but you need a place to live, whether that's a multifamily development to rent, or it's a single-family home
    you buy. We need to be keeping pace with household formation. And this seems to be one of the biggest hurdles towards building
    more homes. It’s very much concentrated and it's not uniform across the US. We do find, when you look at some of these regulatory
    burdens, they seem to be concentrated in California and the East Coast. Unsurprisingly. So you see in Massachusetts, and even in
    Florida, we find higher regulatory burdens. These costs that the builders incur in the process are then passed on to the potential
    home buyer. And it's not just zoning, right, there are other costs incurred. There are permitting costs. There is the time it takes to get
    through the approval process. How long it takes for them to build. All of these things have a cost associated to it, and it's tough for
    them to build.

    Mark Fleming: It feels like the old adage – time is money. Right. Time is money. So, it can be done either directly through money or
    through time, but this ends up being the same thing – money. But these are good problems. I mean, we talked about all these issues,
    but these are good problems to have in the building industry because the challenge is tons of demand and a struggle to meet it with
    the supply. I'd much rather be in that position than where the home construction sector was in the global financial crisis. The reason it
    contracted so much and the reason so much labor left the market was all of a sudden there was no demand. No demand anymore,
    relative to the supply. We're in exactly the opposite situation. Our challenge is, how do we meet the demand? And we like to say, build
    it and they will come.

    Odeta Kushi: Absolutely. And I think that's a great way to end. Thank you, everyone, for joining us on this episode of the REconomy
    podcast. Be sure to subscribe on Apple, Google, Spotify, or your favorite podcast platform. You can also sign up for our blog at
    firstam.com/economics. And if you can't wait for the next episode, please follow us on Twitter. It's @OdetaKushi for me and
    @MFlemingEcon for Mark. Thank you and until next time.

    January 22, 2021

    Why Housing Market Potential May Build on Momentum from Historic 2020

    By Mark Fleming and Odeta Kushi, First American Insights -- In the final month of 2020, the market potential for existing-home
    sales reached its highest point since 2007, rising to a 6.18 million seasonally adjusted annualized rate (SAAR) of sales. While the
    winter months are traditionally real estate’s slow season, the housing market had one more surprise for us in 2020 as our measure of
    the market potential for existing-home sales showed the housing market again broke with traditional seasonal patterns during this
    unprecedented year.

    “Twin housing market accelerants -- record low mortgage rates and the demographic boost from millennials, the largest generation in
    U.S. history, aging into their prime homebuying years – super-charged demand. Yet, the housing market also faces a historic and
    worsening inventory impasse you can’t buy what’s not for sale.”

    Twin housing market accelerants – record low mortgage rates and the demographic boost from millennials, the largest generation in
    U.S. history, aging into their prime homebuying years – super-charged demand. Yet, the housing market also faces a historic and
    worsening inventory impasse - you can’t buy what’s not for sale. In 2020, the growth in house-buying power fueled by low mortgage
    rates was the primary driver of housing market potential, while existing homeowners choosing not to list their homes for sale was the
    biggest headwind. Fortunately, the potential sales increase from house-buying power was more than the loss from rising tenure
    length in 2020.

    House-Buying Power, Millennials Super-Charge Housing Market Demand

    House-buying power, how much home one can afford to buy given their income and the prevailing mortgage rate, is a key driver of
    home-buying demand. The primary reason for the increase in house-buying power in 2020 was falling mortgage rates. Since
    December 2019, the 30-year, fixed-rate mortgage fell by slightly more than one percentage point. Holding household income constant
    at its December 2019 level, that means potential home buyers gained nearly $60,000 in house-buying power from falling mortgage
    rates alone. If you factor in the growth in household income, home buyers gained approximately $87,000 of total house-buying power
    in 2020. Because an increase in house-buying power allows a potential home buyer to purchase more home for the same monthly
    payment or purchase the same amount of home for a lower monthly payment, increased house-buying power helped super-charge
    housing market potential. Compared with one year ago, falling mortgage rates and rising incomes for those still employed resulted in
    nearly 389,000 potential home sales in December.

    Rising Tenure Squeezes Housing Market Supply

    Existing-home sales make up approximately 90 percent of all sales, so the rising tenure length of existing homeowners means fewer
    and fewer homes for sale and is the primary reason for the lack of housing supply. As existing homeowners have increasingly chosen
    not to list their homes for sale during the pandemic, average tenure length – the amount of time someone lives in their home – has
    soared to a historic high of approximately 10.5 years, up from an average of 10 years just one year ago. In last month’s existing-home
    sales report, months’ supply hit a historic low of 2.3 months. That means it would take just over two months to run out of homes for
    sale at the current pace of sales. The lack of homes for sale caused by the increase in tenure length reduced the potential for
    existing-home sales by 170,200 in December compared with a year ago.

    What should we expect in 2021? More of the same, but in a more positive economic environment. The successful dissemination of a
    vaccine should put an end to the “stop-start” pattern of restrictions imposed on businesses, which should help the economy recover.
    Low mortgage rates will continue to support strong house-buying power as more and more millennials age into homeownership,
    keeping demand robust. While the supply-demand imbalance will persist, existing homeowners who were hesitant to sell amidst the
    worst of the pandemic may be encouraged to bring their homes to market, relieving some of the supply shortage. Swelling demand
    and the potential for greater supply means housing market potential in 2021 is likely to remain strong and build off a historic 2020.

    December 2020 Potential Home Sales

    For the month of December, First American updated its proprietary Potential Home Sales Model to show that:

  • Potential existing-home sales increased to a 6.18 million seasonally adjusted annualized rate (SAAR), a 2.3 percent
    month-over-month increase.
  • This represents a 77.1 percent increase from the market potential low point reached in February 1993.
  • The market potential for existing-home sales increased 11.9 percent compared with a year ago, a gain of nearly 658,628
    (SAAR) sales.
  • Currently, potential existing-home sales is 683,971 million (SAAR), or 10.0 percent below the pre-recession peak of
    market potential, which occurred in April 2006.

    Market Performance Gap

  • The market for existing-home sales underperformed its potential by 1.2 percent or an estimated 73,142 (SAAR) sales.
  • The market performance gap increased by an estimated 21,960 (SAAR) sales between November 2020 and December

    What Insight Does the Potential Home Sales Model Reveal?

    When considering the right time to buy or sell a home, an important factor in the decision should be the market’s overall health, which
    is largely a function of supply and demand. Knowing how close the market is to a healthy level of activity can help consumers
    determine if it is a good time to buy or sell, and what might happen to the market in the future. That is difficult to assess when looking
    at the number of homes sold at a particular point in time without understanding the health of the market at that time. Historical context
    is critically important. Our potential home sales model measures what we believe a healthy market level of home sales should be
    based on the economic, demographic and housing market environments.

    About the Potential Home Sales Model

    Potential home sales measures existing-home sales, which include single-family homes, townhomes, condominiums and co-ops on a
    seasonally adjusted annualized rate based on the historical relationship between existing-home sales and U.S. population
    demographic data, homeowner tenure, house-buying power in the U.S. economy, price trends in the U.S. housing market, and
    conditions in the financial market. When the actual level of existing-home sales are significantly above potential home sales, the pace
    of turnover is not supported by market fundamentals and there is an increased likelihood of a market correction. Conversely,
    seasonally adjusted, annualized rates of actual existing-home sales below the level of potential existing-home sales indicate market
    turnover is underperforming the rate fundamentally supported by the current conditions. Actual seasonally adjusted annualized
    existing-home sales may exceed or fall short of the potential rate of sales for a variety of reasons, including non-traditional market
    conditions, policy constraints and market participant behavior. Recent potential home sale estimates are subject to revision to reflect
    the most up-to-date information available on the economy, housing market and financial conditions. The Potential Home Sales model
    is published prior to the National Association of Realtors’ Existing-Home Sales report each month.

    January 18, 2021

    Active Listings Plummet to Historic Low

    By Phil, Hall, The Mortgage Report -- Active listings dropped by 33% year-over-year to a new all-time low, according to data
    released by Redfin for the four-week period ending January 10.

    Redfin determined there were 547,725 active listings for the period it tracked, down from 815,901 active listings during the same
    period in the previous year. New listings were down by 3%, marking the first decline since July.

    But while active and new listings were on the decline, sales and prices were on the rise. Redfin reported pending home sales were up
    35% year-over-year, while 38% of homes that went under contract had an accepted offer within the first two weeks on the market,
    compared to 27% during the same period one year ago. Mortgage applications were up 10% year-over-year, and the median home
    sale price increased 14% year-over-year from $280,100 to $320,025.

    "Buyers are likely disappointed by the lack of new homes listed in the past month," said Redfin Chief Economist Daryl Fairweather.
    "But that's not stopping them from making offers on what is on the market, which is sending pending sales up. It's looking like 2021 will
    see a housing market frenzy that will rival what we experienced in 2020."

    Last week, Redfin reported 49.7% of the home offers written its agents involved bidding wars between prospective buyers.

    Although December’s rate was down from the revised rate of 55.9% in November, it was also the eighth consecutive month where
    nearly half or more of Redfin offers encountered competition. Homes listed between $1 million and $1.5 million were the most likely to
    be the target of bidding wars, with 60.3% of Redfin offers being fueled by this competition. Redfin also reported that 55.3% of homes
    listed between $600,000 and $800,000 and 34% of homes listed for less than $200,000 were subject to this form of financial duel.

    January 7, 2021

    For 2021 housing data, context is key

    You have to be careful interpreting year-over-year data with a pandemic year

    By Logan Mohtashami, Housing Wire -- 2021 was supposed to be different. In the first days of the New Year, we have been dealing
    with a new strain of COVID, vaccinations aren’t going as planned and the political drama is hotter than ever. It is starting to seem like
    2020 all over again.

    But things are different. On Jan. 5 the 10-year Treasury yield broke 1%, and on Jan. 6 the 10-year remained above that line in the
    sand even with the storming of Capitol Hill. America’s fight against COVID-19 still presses on, but we do see the light at the end of the

    This 10-year yield milestone is important to keep in mind when we look at the housing data in the coming months. The housing data in
    late 2020 went parabolic by some measures and now it should moderate to a normal trend. But unless we see noticeable hits on
    forward-looking indicators of demand, like the MBA purchase applications, we shouldn’t interpret the moderation of housing sales
    metrics as anything other than going back to trend.

    When tracking MBA purchase application data as a means of determining demand in the marketplace, my usual recommendation
    would be to only consider the year-over-year data from the second week of January to the first week of May. The data from this
    period provides an excellent snapshot of the market as a whole for the year. At least, this would be true if last year could be
    considered a “normal” year for the market, except it wasn’t.

    Since 2020 was by no measures typical, including for the housing market, I provide here some considerations to take into account
    when interpreting the year-over-year purchase application data for 2021 that take into account how significant the effect of the
    COVID crisis was to this metric.

    First, when considering the purchase application data for the first 2.5 months (approximately) of 2021, remember that 2020 started off
    strong.  Last year we had year-over-year growth of around 10% in purchase applications each week up until March 18. We did not
    have growth like this in 2018 or 2019. This was the first real breakout sales data in housing we had seen in a long time, as the
    February existing home sales report came in at 5,760,000.

    For 31 straight weeks, from the end of May to before Christmas, purchase applications were trending at over 20% growth year over
    year. This strong growth was due to demand that was stalled during the nine weeks in 2020 when purchase applications went
    negative year over year. In other words, this was make-up demand and we can’t expect this trend to continue. I don’t believe that
    when the data normalizes we will see 20% growth trends.

    But, if in the early part of 2021 we can see 1%- 11% growth in purchase applications, year over year, that would seem correct to me.
    Above 12% growth early in the year just means that we are still making up for the lost demand we saw last year, something that I have
    been talking about for many months now.

    Tuesday’s purchase application data showed 3% year-over-year growth, but I wouldn’t read too much into that due to the Christmas
    and New Year’s holidays.

    Second, when considering the purchase application data in 2021 for the period after March 18, realize that we are going to see
    enormous year-over-year growth, especially during the first five weeks of this period. 2020 purchase application data took a waterfall
    dive during this period due to the shutdown mandates that were imposed in many communities and the simple fear of the virus and
    what it would do to our economy.

    Remember we were hoarding toilet paper and water back then. Some analysts may try to position this year-over-year growth in 2021
    as a boom. It is not. Even if purchase application data went down 10% year over year, we will show over 20% year-over-year growth
    for some of these weeks. Just take that into consideration during that nine-week time period.

    Third, when considering the purchase application data for the period of 2021 past the nine negative weeks of 2020 to the end of the
    year, note that the 2020 comparisons will likely have harder than normal comps all the way to Christmas week. So, yes, we need to
    know this now, so if we see weaker year-over-year data during the second half, we have some context to go with the data.

    The last thing to keep in mind for all of 2021 is that the “too-hot” demand we have had going into 2021 will moderate as that was more
    a function of make-up demand after the drop in housing data due to COVID-19. This should be expected by everyone. Don’t be like
    the housing bubble crash boys who, for the last eight years, have taken every soft number (even if the metric was positive year over
    year) as evidence for their narrative that the housing market is on the verge of a 30%-50% price crash in a calendar year.

    Remember, this merry band of forbearance crash bros are professional grifters, not economic data people. I have already seen some
    of these terrible takes on the recent housing data.

    For 2021, I expect existing home sales to have some prints roughly around 6.2 million once the data moderates to a trend.
    Remember, existing home sales ended the year 2019 at 5.3 million. The February existing home sales data in 2020 showed that if we
    don’t complete the year at 5,710,000 to 5,840,000 in sales, then COVID-19 not only delayed demand but also erased some of it last
    year. This will be made up in 2021.

    At some point in the future, the data will moderate enough to get a better trend going. Remember, the big theme here is steady,
    replacement demographic built-in demand while mortgage rates are this low. More information on that can be found in a podcast
    interview I did recently with HousingWire.

    December 31, 2020

    How record-low mortgage rates changed everything in 2020

    Year ends with the lowest mortgage rates ever at 2.66%. Here's a look at how we got there

    By Alex Roha, Housing Wire -- While the United States may not have been prepared to combat a deadly virus, a quick and robust
    response from the Federal Reserve, along with changing consumer preferences, created a perfect storm that resulted in a record
    year for the housing and mortgage industries. Mortgage rates would fall to record lows 16 times throughout 2020, with origination
    volume expected to eclipse $4 trillion.

    When the pandemic started, no one in the housing industry had projected the best year on record. Quite the opposite.

    Here’s a detailed month-by-month analysis of what caused mortgage rates to fall so dramatically, and how it affected virtually every
    sector within the housing market.


    Investors began to show an increased concern about the economic impact from China’s coronavirus outbreak, driving rates to a three-
    year low of 3.51%, according to Freddie Mac’s Primary Mortgage Market Survey (PMMS).

    With borrowers hopping on these low rates, economists began to see a glimmer of heightened refinance activity after a low turn-out
    for refi’s in December predicted a possible end to the refi boom.

    But consumers were still interested in that new home smell. Sales of new homes spiked 18.6% year-over-year as borrowers locked in
    low rates on new lots – combined with a five-month supply of homes, housing expected a strong spring season.


    Heightened uncertainty about the virus sent money flowing back in to the U.S bond market. Increased competition for mortgage-
    backed securities resulted in lower yields, and ultimately, lower rates for borrowers. In fact, the yield on the benchmark 10-year U.S.
    Treasury note fell to a record low this month.

    Though rates fluctuated in a 5-basis-point range throughout the month, by the end of February, they settled to another three-year-
    low at 3.45%.

    But economists still weren’t convinced that those record lows could get much lower. Analysts at Capital Economics expected stretched
    lender capacity and increased caution would widen the spread in yield, however, not fully translate in to lower rates.


    America braces itself, as do lenders. Prior to the national emergency issued on March 13 and the 1.8 million people placed in
    temporary layoff, the month began with rates hitting Freddie Mac’s 50-year survey low of 3.29%. Spoiler – this will not be the last time
    rates break their own record.

    Crucially, on March 23 Federal Reserve Chairman Jerome Powell announced the central bank would make “unlimited” MBS
    purchases, pushing the average 30-year fixed mortgage back down to 3.5% by the end of the month following an up-and-down
    several weeks.

    “As these purchases roll forward, you will see the Treasury market and the MBS market returning to normal market function, and that
    will actually support economic activity,” Powell told reporters on a March 15 call.

    Still, that didn’t stop most lenders from limiting new originations and hoarding cash. Layoffs within the industry followed, some
    companies shut down, and the iBuyers pressed pause. All the while, servicers waited for the nightmare scenario to play out.


    Another month of zig-zagging and another all-time record low, rates in April finish at 3.23%.

    But a catch-22 had formed: though record-low rates were available, millions of potential borrowers couldn’t tap in to them. Spiking
    unemployment numbers made borrowing riskier, and the tightening of standards by lenders big and small left many consumers on the
    outside looking in.


    Surprise – it’s another record low! Rates fall to 3.15% and help purchase demand rebound from a 35-year-over-year decline in mid-
    April to an 8% increase by the end of May.

    Low rates also continued to feed the refinance frenzy for many segments of borrowers while buyers created for a very early summer
    homebuying season.

    Record low rates also begin their gradual squeeze on home prices.


    Despite a tumultuous period for the economy, housing had proved itself steady.

    Keeping the ball rolling, the Federal Reserve continued to support the mortgage markets by purchasing about $4.5 billion a day of
    securities containing home loans packaged by Fannie Mae, Freddie Mac and Ginnie Mae.

    Concerns over a housing meltdown had mostly allayed, and lenders were making a killing on vanilla 30-year purchase loans and
    refinancings. Mortgage rates bottom out once again to 3.13% and hold firm during the last two weeks of June thanks to declining
    inflation pressures and heightened homebuying attitudes.

    While the jump in refis was expected after the Federal Reserve‘s bond-buying shrank yields on mortgage-backed securities, the spike
    in demand for purchase loans was a surprise, said Mortgage Bankers Association Chief Economist Mike Fratantoni.

    Lenders and servicers begin beefing up their employment to cater to all the borrowers vying for a piece of the low-rate pie. Tens of
    thousands of workers were hired to handle unprecedented capacity issues. Though some of the big companies hired inexperienced
    staffers by the busload, experienced underwriters were commanding salaries well over $100,000, often with five-figure bonsues.

    Taking advantage of the low interest rates, some lenders began offering products at never-before-seen levels. United Wholesale
    Mortgage caught headlines by offering rates as low as 2.25% for VA loans (though, to be fair, ultra-low-rate products aren’t always
    what they seem).


    For the first time in survey history, rates fall below 3% – breaking their own record three times this month to an all-time low of 2.98%.

    Record lows in mortgage rates incentivized more households to refinance – a move many economists said helped put more money in
    their pockets for consumer spending while the country fought unstable unemployment rates.

    By this point, Powell said the Fed isn’t even remotely thinking about raising rates.

    “We’re stepping in to provide credit at a time when the market has stopped functioning,” Powell said.

    July also reported that thanks to low rates, the second quarter of 2020 experienced a 12-year high in homeownership.

    Some lenders, unable to keep up with capacity, began throttling their pipelines.


    After hitting a record low for the eight time at the beginning of August to 2.91%, rates managed to remain low, still hovering below 3%
    for the entirety of the month.

    However, inventory is struggling to keep up with demand (lenders are too; some lenders can’t close loans in under two months).

    Bidding wars are putting upwards pressure on home prices and some lenders are even dangling a 1.99% carrot for the 30-year
    conventional rate in borrowers faces.

    The environment also convinced a slew of mortgage lenders to go public, much to the delight of their investors, who are typically
    private equity firms. Rocket Companies was the first, but Guild, Caliber, LoanDepot, UWM, Finance of America, Better.com, SoFi,
    AmeriHome all make plans to IPO. By the end of 2020, only Guild and Rocket actually entered the public markets.

    Meanwhile, refinancings rose to 65.7% of total applications by the middle of the month. With so much refi activity, the GSE’s decide to
    take their share and impose a 50 bps fee on refinance mortgages that they buy. And lenders and LOs totally took it in stride! Kidding!
    People freaked out!


    Spring buying, turns in to summer buying, turns in to fall buying season. Rates break their own record 10 days in to September at
    2.93%. But demand is still hurting homebuyers’ chances.

    While rates are causing borrowers disdain in some of the more competitive regions, lenders are reaping the benefits. Rocket
    Companies revealed this month a $3.5 billion profit in the second quarter of the year and even forecasted between $82 billion and
    $85 billion in loan originations for the third quarter.

    Plans for low rates to last also revealed themselves after 13 members of the Federal Reserve’s Federal Open Market Committee said
    they expect to keep the central bank’s benchmark rate near zero through 2023.


    Record-low rates become the new normal as rates plummet to 2.8% by the end of the month. At this point in time, mortgage rates are
    on average more than a full percentage point lower than rates over the last five years.

    While one end of the market continued to flourish from demand, a surprising 34% of home sellers said they were staying out of the
    market due to COVID-19’s uncertainty in a Zillow survey, and approximately 3 million homeowners were in forbearance plans.


    Weaker consumer spending data, which accounts for the majority of economic growth, drove mortgage rates to their 13th record low
    at 2.72%.

    Fannie Mae’s Home Purchase Sentiment Index, a composite index designed to track the housing market and consumers’ desire to sell
    or buy a home, also revealed that consumers and the industry alike are confident that a low rate environment will hold.

    Historically, presidential elections can play with the market as investors ponder the direction of the economy. However, observers
    from across the housing and mortgage space said interest rates will continue to hover near historic lows for the next several years,
    regardless of who occupies the White House.


    A vaccine has been deployed but the trajectory of the economy is still up in the air. Rates break their own record a whopping three
    times this month to eventually settle at 2.66% as of the 24th.

    According to Sam Khater, chief economist of Freddie Mac, the housing market is poised to finish the year strong as low mortgage
    rates continue to fuel homebuyer demand and refinance activity.

    Throughout the month, mortgage rates managed to retain their record low numbers despite higher Treasury yields – resisting a
    typical correlation.

    A mid-month statement from the Federal Open Market Committee revealed that the Federal Reserve plans to keep interest rates low
    until labor market conditions and inflation meet the committee’s standards. Chairman Powell said to get inflation back to 2% though is
    going to “take some time.”

    December 3, 2020

    Why the Big Short in Housing Supply Will Remain in 2021

    “Despite the best intentions of home builders to provide more housing supply, the big short in housing supply
    will continue into 2021 and likely keep house price appreciation flying high.”

    By Mark Fleming, First American Blog (Economics) – As the housing market has recovered from the initial impacts of the
    pandemic, nominal house price appreciation has soared, but affordability actually improved until recently due to the house-buying
    power benefit from historically low mortgage rates. However, for the second month in a row, the Real House Price Index (RHPI)
    increased, indicating declining affordability. The reason? Rapid nominal house price appreciation has finally outpaced the house-
    buying power benefit from historically low mortgage rates. The low rates have helped fuel the surge in demand since April in a
    housing market that is desperate for supply, which is Econ 101 for faster house price appreciation that out-competes rising house-
    buying power. But, just how big a short is the supply shortage? Historic.

    What’s Supply Got to Do With It?

    Inventory turnover – the total supply of homes for sale nationwide as a percentage of occupied residential inventory – was low prior to
    the pandemic, but began to drop precipitously starting in April. Since 1991, on average, 2.5 percent of the stock of homes are for
    sale in any single month. Throughout 2019 and preceding the pandemic, average inventory was 1.65 percent, but the pandemic-
    induced supply contraction further reduced average inventory to nearly 1.4 percent in April. Since then, average inventory has
    steadily declined to 1.3 percent. That means only 130 homes in every 10,000 are for sale, compared with almost double that amount
    in normal times.

    Existing-home sales make up approximately 90 percent of all home sales and in October the seasonally-adjusted months’ supply for
    existing homes hit a historic low of 2.5 months. As existing homeowners have withdrawn supply, average tenure length – the amount
    of time someone lives in their home – has soared to a historic high of approximately 10.5 years. Ultimately, rising tenure length means
    there are fewer homes on the market and as demand has surged the competition among home buyers for the small amount of homes
    for sale drives prices up.

    Homebuilders to the Rescue?

    If there aren’t enough existing-homes available for sale to meet demand, then can home builders build more homes and add more
    inventory? Homebuilders have responded to the supply shortage. In October, housing starts increased 14 percent compared with a
    year ago, and new home sales were approximately 1 million (SAAR) in September and October. This is a positive sign of potential
    new supply under construction, but it’s unlikely to change the supply dynamic quickly. The US housing supply has been underbuilt for
    over a decade and it will take years of accelerated new home construction to close the gap.

    Despite the challenging economic conditions for many households, for those fortunate enough to continue to have stable income,
    house-buying power is the highest its ever been because of historically low mortgage rates. As more and more potential home buyers
    rush to take advantage of sub-three percent mortgage rates in an environment of limited homes available for sale, multiple-offer
    bidding wars become the norm and prices are pushed higher.

    Mortgage rates are expected to remain low for the foreseeable future and millennials will continue forming households, keeping
    demand robust, even if income growth moderates. Despite the best intentions of home builders to provide more housing supply, the
    big short in housing supply will continue into 2021 and likely keep house price appreciation flying high.

    November 10, 2020

    Non-QM lenders are back. But will brokers pick up the phone?

    Non-QM originators are ramping up operations, but finding brokers willing to work the loans remains a

    By James Kleimann, Housing Wire -- Mark Dodson was having a promising start to the year. His corner of the Atlanta mortgage
    market – high-value home loans that wouldn’t be bought by the GSEs – was booming.

    But by March there were whispers that the non-QM space was going to vanish soon. Liquidity had dried up and bond investors were
    running for the hills.

    At that point, Dodson was actively working on a jumbo loan for friends of his from church.

    “I told my client, my friends, ‘Look, I know you’re supposed to close in 10 days but we’re closing Friday and you let everybody know it
    or you may not close,’” Dodson said. “And damn if we didn’t close Friday and they shut it down Monday.”

    “I lost $6 million in April,” the broker added.

    During the freeze, non-QM lenders – who issue mortgages that can’t be sold to Fannie Mae or Freddie Mac, typically to self-
    employed borrowers – stopped accepting applications, collectively laid off hundreds of workers; had difficult conversations with their
    investors, correspondent partners and mortgage brokers alike; and plotted an eventual return to an uncertain market.

    Some firms quickly pivoted to conventional products to serve remaining customers. Others took stock of their product offerings and
    tech stacks and initiated strategies to build stronger companies in the wake of the pandemic. Over the last several months, liquidity
    has poured back into the non-QM market, prompting roughly a half-dozen lenders to once again underwrite non-QM loans.

    “Pre-COVID, loans were trading at 103, 104, maybe even 105 [cents to the dollar], and the margins were there and it was a
    successful business,” said Keith Lind, the executive chairman and president of Citadel Servicing, one of the biggest non-QM lenders
    in the country. “The origination credit quality was very good. But when the credit markets seize up and liquidity stops, all of the
    sudden we went to maybe a low of 85 or 88 cents on the dollar. So when that happens, you don’t originate, you don’t lend at par for
    something at 88. So you stop.”

    Everyone bowed out. Citadel’s competitors Angel Oak Mortgage Solutions, New Rez Mortgage, Caliber Home Loans, Athas Capital
    Group, Carrington Mortgage Services and First Guaranty Mortgage Company all halted issuing non-QM loans, which comprise
    roughly 5% of the overall mortgage market.

    Though most of the sizable non-QM lenders have rehired staff, resumed lending or are on the cusp of doing so, they must still
    contend with a thorny problem: a good chunk of mortgage brokers are so awash in comparatively easy mortgages that they won’t
    bother with non-QM products, which are more complex and time-consuming than conforming mortgages.

    “When Angel Oak Mortgage Solutions launched seven years ago, we had to educate [brokers] on the non-QM space,” said John
    Jeanmonod, a vice president at the Atlanta-based non-QM lender. “Now we’re educating them on why there was a pause. Most of
    them know why, but all of them really just want to know, ‘How are you going to try and close my customer today?’”

    He added: “What we’re really trying to tell them now, almost more than ever, is that the self-employed borrower hasn’t gone away.
    And whether you do it or someone else does it, that loan is going to get done.”

    This ain’t your daddy’s subprime

    About a decade ago, mortgages that were ineligible to be bought by Fannie and Freddie were tagged with the odious label
    “subprime.” Such mortgages, infamous for atrocious credit standards and a lack of skin in the game on the part of borrowers,
    ushered in a collapse of the housing market, which triggered the Great Recession of 2008.

    Loans that don’t meet the GSEs’ standard today are known as non-QM, but few observers believe there are parallels to what
    happened 12 years ago. Lenders today have more rigorous standards on non-QM products, and forbearance rates roughly are in
    line with agency loans. As is true with loans sold to Fannie and Freddie, non-QM lenders must ensure the borrower can pay back the
    loan and is credit-worthy. But unlike Fannie and Freddie, most non-QM loans rely on the borrower’s credit score and the loan-to-
    value ratio on the loan, rather than the debt-to-income ratio.

    The products appeal mostly to independent contractors and self-employed borrowers, with non-QM lenders often marketing their
    wares to real estate agents who have entrepreneurs for clients.

    “Self-employed borrowers take advantage of the tax laws,” said Dodson, who runs Mortgage Capital Advisors. “For eight years they
    were not able to get a mortgage loan – they could have an 800 credit score, $2 million in the bank. But they were still hampered
    because lenders wouldn’t give them a loan. That’s when we get ‘em. I’m also finding that self-employed people know a lot of self-
    employed people. It’s about getting word out to them. Realtors need to be your ally.”

    There’s a common misconception that because the products aren’t guaranteed by the federal government, they’re marred by sloppy
    underwriting or exorbitant risk, mortgage executives and brokers said.

    “It was just a liquidity issue,” said Angel Oak’s Jeanmonod of the tremors in the spring. “Everyone gets the non-QM sorely confused
    with what happened during the mortgage meltdown…our underwriters are the best in the business. ”

    Angel Oak relaunched in May with a pared back set of products and tightened down payment requirements. Since May, they’ve had
    19 enhancements to their programs due to renewed liquidity. “We still don’t have all the programs back yet,” Jeanmonod said. “We
    have the bank statement program, jumbo loans. It wasn’t that borrowers weren’t performing, it was that the investors didn’t have a
    broad appetite.”

    Citadel has also returned with a streamlined list of products. It now does three-month bank statements as opposed to one month, and
    requires higher levels in reserves.

    Since the market has returned, borrowers with sizable reserves and strong credit histories are typically finding interest rates in the 5%
    and 6% range, said Yonce.

    The path of least resistance

    Though the non-QM lenders are frustrated by a reluctance on the part of some brokers to push their products, they understand the
    dynamic at play: it’s the path of least resistance, and the non-QM reputation perhaps doesn’t live up to its underwriting quality.

    Most mortgage brokers would rather collect 100 bps a pop on simple refinancing deals that take a few weeks than a non-QM product
    that takes at least twice as long to close, non-QM executives said.

    “It’s not the borrowers, it’s the fact that the brokers aren’t focusing on non-QM,” said Lind. “They’re going to the low-hanging fruit, the
    agency product because they’re probably making more money. But I think we’ve done a very good job – we’re extremely efficient,
    return times are fantastic and if you give us a non-QM loan we’re going to close it.”

    One broker said abandoning agency loans in favor of non-QM product in the current environment simply didn’t make business sense
    right now.

    “I wouldn’t chase that business because I have 46 loans in process that are fairly simple to do,” said Matt Gougé, a broker at Answer
    Home Loans in Folsom, California. “And non-QM loans in my experience are harder.”

    Yonce, who runs Dallas-based Greater Texas Mortgage, said the non-QM space still has to work on its perception in the marketplace.

    “Newer loan officers are scared of the business because they think it has to do with predatory lending,” said Yonce. “And it doesn’t. It’
    s the total opposite from that. They don’t understand it, so they can’t sell it to the customer.”

    Jeanmonod and Lind both noted that brokers will be more conscious of the non-QM market when rates fall and the refi business slows.

    “There are people out there who are just focusing on refis, and when those go away that LO is in jeopardy of losing income,” said
    Jeanmonod. “Like anything, you have that seasoned loan officer who has a stream of referral sources whether it’s a Realtor, CPA,
    bankruptcy attorney, etc. they hopefully cherish that referral source and work on all loans equally.”

    The ups and downs of the non-QM market over the past calendar year has led to a flurry of referral activity. Loan originators at retail
    banks pushed non-QM deals to specialist brokers like Dodson and Yonce, they said.

    Dodson said he had a client who recently made a $1.8 million purchase after he was turned down by a retail bank. The client had
    adequate reserves, a great credit score and two years of bank statements to determine income. Angel Oak funded the loan.

    “He was thrilled he had an option of buying this house when he didn’t have one two days earlier,” said Dodson. “In this case, the
    banker referred him to us.”

    Business is “not quite there yet“

    Though the lenders and brokers are back cranking loans and investors are comfortable with non-QM products, they’re still not quite
    firing on all cylinders like they had been in January.

    In January, non-QM loans were arguably the hottest product on the mortgage market and were on a high not seen since 2007. They
    were performing better than FHA and conventional loans, said Yonce. Then COVID hit.

    “So at that point, it was really strong – I was averaging probably at least three bank statement loans a month,” said Yonce. “And then
    when COVID hit, they went away overnight.”

    But lenders and brokers are both optimistic that business will return to normal levels in 2021.

    “We started originating in August, we funded our first loan in September. I think we’ll be back to our pre-COVID levels hopefully by
    early spring,” said Citadel’s Lind. “Pre-COVID, 65% of our business was cash-out, now 70% of our business is purchase. I think rates
    up in the agency market is going to be very humbling…and there will be a lot of tailwinds for the non-QM work.”

    “We’re not there yet,” added Dodson. “We were killing it with the non-QM. The higher loan-to-value loans aren’t back yet but we got
    90% bank statement deals back and that’s a big, big product.”

    Jeanmonod, who’s based in Dallas, said Angel Oak is about 50% back to normal levels (they originated about $3.3 billion in
    mortgages in 2019). “We’re probably about halfway back and increasing every month,” he said. “Our month-over-month growth has
    been outstanding. It’s going to hockey stick back.”

    November 5, 2020

    Homeowners and buyers are the real winners in this election

    By Diana Olick, CNBC -- Key Pointes

  • The average rate on the popular 30-year fixed mortgage fell to 2.78% for the week ending Nov. 5, down from 2.81% the
    previous week and 3.69% the same week one year ago, according to Freddie Mac.
  • Other mortgage products, including the 15-year fixed, FHA loans and jumbo mortgages, set new record lows for their average
    rates last week, according to the Mortgage Bankers Association.

    Volatility surrounding the 2020 presidential election has helped push mortgage rates to their 12th record low this year, giving both
    homeowners and buyers a boost.

    The average rate on the popular 30-year fixed mortgage fell to 2.78% for the week ending Nov. 5, down from 2.81% the previous
    week and 3.69% the same week one year ago, according to Freddie Mac.

    “Interest rates dropped to another record low this week ... because of uncertainty around the election results,” said George Ratiu,
    senior economist at realtor.com.

    “In a volatile economic environment, where the number of Americans filing for initial unemployment just last week totaled an elevated
    751,000, and with low returns due to the Federal Reserve’s quantitative easing, bond investors sought the relative safety of
    mortgage-backed securities.”

    Mortgage rates follow loosely the yield on the 10-year U.S. Treasury.

    Other mortgage products, including the 15-year fixed, FHA loans and jumbo mortgages, set new record lows for their average rates
    last week, according to the Mortgage Bankers Association, or MBA.

    With rates now close to a full percentage point lower than they were a year ago, homeowners are rushing to refinance yet again,
    even as so many have already refinanced in the past year. Mortgage applications to refinance a home loan were over 80% higher
    last week compared with a year ago, according to the MBA.

    For homebuyers, consistently low rates over the past several months, and the almost weekly prospect of rates falling even lower,
    have only fueled already strong demand. After a very brief pause at the start of the pandemic, buyers came rushing back, looking for
    a safe haven as well as larger spaces for working and schooling from home.

    “With a rising second wave of COVID cases, the challenge of social distancing continues to drive peoples’ quest for a housing
    solution,” said Ratiu.

    For the first time since 2011, homes sold faster in October than September and prices remained at their summer peak of $350,000,
    according to calculations by realtor.com, which included data from the National Association of Realtors.

    While low interest rates have given buyers additional purchasing power, they have only added to already soaring home prices. The
    record-low supply of homes for sale is causing bidding wars in markets across the nation.

    In Denver, for example, record low inventory of less than a one-month supply pushed prices to yet another record high.

    “October continued to defy seasonality as new records were broken by both buyers and sellers,” said Andrew Abrams, chair of the
    Denver Metro Association of Realtors’ market trends committee.

    “Sellers continued to have little competition as escalation clauses, appraisal gap waivers and “as-is” offers were frequently used,
    while buyers had to fight hard, making concessions in all of the ways referenced above, to secure a place they could call home,” he

    October 29, 2020

    Mortgage rates remain near record low amid stock market turbulence

    By Michele Lerner, Washington Post - Mortgage rates remained near record lows last week, according to a Freddie Mac survey
    released Thursday, amid turbulence in the stock market spurred by investors’ uncertainty over rising coronavirus cases and stalled
    relief talks.

    The average for a 30-year fixed-rate mortgage ticked up to 2.81 percent from 2.8 percent with an average 0.7 point. (A point is a fee
    borrowers pay, usually about 1 percent of the loan, to get a better rate.) The average rate, nearly the lowest since Freddie Mac
    began conducting the survey in the early 1970s, is far below the 3.78 percent level a year ago.

    The 15-year fixed-rate average ticked down to 2.32 percent from 2.33 percent, with an average 0.6 point. The five-year adjustable-
    rate average of 2.88 percent, with an average 0.3 point, was slightly up from the 2.87 percent of the previous week. A year ago, the
    15-year rate was 3.19 percent and the five-year was 3.43 percent.

    Home sales rise despite low inventory and pandemic

    “I’m a little surprised that mortgage rates didn’t decline a little more this week, given the volatility in the stock market, but maybe there’
    s just no more room to fall,” said Lawrence Yun, chief economist for the National Association of Realtors. “Rates have been so low for
    so many months and it may be that lenders are still overwhelmed with the volume of loan applications that they are putting a little
    brake on new applications by not offering even lower rates.”

    Also Thursday, the Bureau of Economic Analysis reported that the U.S. gross domestic product increased at an annual rate of 33.1
    percent in the third quarter of 2020 as businesses began to reopen. The GDP dropped 31.4 percent during the second quarter. This
    positive GDP data could impact the stock market, which in turn may move mortgage rates.

    “Typically, a flight from the stock market drives a flight to safety, which means cash or bonds. Once a trend of stability is broken, the
    markets look for new direction," Brian Koss, executive vice president of Mortgage Network in Danvers, Mass., said in an email.

    “But these pre-election jitters will cause volatility in either direction,” Koss added. "Until we have the election settled, the markets will
    be unpredictable. The impact on rates will probably be minimal. Generally speaking, there is no direct relationship between the stock
    market and mortgage rates, but when investors flock to bonds, mortgage rates usually fall. That being said, rates are already very low
    and unlikely to get much lower.”

    Since spring, mortgage rates have plunged to record low levels, based largely on Federal Reserve intervention aimed at stabilizing
    the housing market. The Fed has been attempting to provide more credit in the market through its purchase of mortgage-backed
    securities — bundled mortgages sold to investors. Mortgage rates should stay low for the long-term, with the Fed indicating it will
    continue with the policy until at least 2023.

    "Rates have been at or near historic lows for months now, and while there may be small dips and bumps, I don’t expect this picture to
    change anytime soon," Stanley Middleman, CEO of Freedom Mortgage in Mount Laurel, N.J., said in an email.

    “The main drivers behind mortgage rates are economic uncertainty and the Fed’s practice of buying mortgage securities, which are
    both likely to continue for the foreseeable future," Middleman added. "There’s a chance rates could drop further if we don’t see
    improvement in employment numbers, which is a possibility now that there’s a new surge in covid-19 cases. Either way, we’re looking
    at low rates well into 2021.”

    Freddie Mac compiles the averages from its Primary Mortgage Market Survey. Every week from Monday to Wednesday, the federally
    chartered mortgage investor queries about 80 lenders nationwide on the rates they’re offering borrowers. The survey is confined to
    borrowers seeking conventional mortgages with excellent credit making a 20 percent down payment.

    Besides the Fed policies, rates are also determined by mortgage bonds investors reacting to the stock market, the yield on 10-year
    Treasury notes as well as a range of political and economic factors, including the fallout from the pandemic.

    Residential market remains active in D.C. area

    Lenders also sometimes raise costs to borrowers when the number of mortgage applications escalates as a way to control the volume
    until they can get a better handle on their workload.

    “The record low mortgage rate environment is providing tangible support to the economy at a critical time, as housing continues to
    propel growth,” Sam Khater, Freddie Mac’s chief economist, said in a statement. “Strong purchase demand is helping to lift the
    construction, manufacturing and transportation industries that build new homes and it is also leading to more consumer spending for
    owners, who are selling or improving their homes. On the refinance front, many consumers are smartly taking advantage of the ability
    to lower their monthly payment, which means they can spend, save or pay down debt more so than they have in the past.”

    We could see mortgage rates decrease next week because of election uncertainty, Yun said.

    “Economic uncertainty drives more investors to seek the safety of U.S. Treasury bonds, which lowers yields,” Yun said.

    One major impact of the extended period of low mortgage rates is that there are approximately 6 million more homeowners this year
    than last year, according to Census Bureau data, Yun said.

    “That’s quite a sizable increase,” he said.

    Consumers considering a $400,000 loan would see a significant savings in interest compared with 2019. Last year at this time, the
    principal and interest would have been $1,859 on a 30-year fixed-rate loan. Today that same loan would require a payment of
    $1,646, a savings of more than $200 per month.

    Meanwhile, the overall number of people seeking mortgages increased last week, according to the Mortgage Bankers Association.

    The market composite index, which measures the total number of applications, rose 1.7 percent last week. The purchase index
    dropped 0.3 percent from last week but jumped 24 percent from a year ago. The refinance index rose 3 percent from a week earlier
    and surged 80 percent from a year earlier.

    “The mortgage market continues to be very active this fall,” Bob Broeksmit, president and CEO of the Mortgage Bankers Association,
    said in a statement.

    “The lack of inventory on the market has sped up the pace of home-price growth in recent months," Broeksmit added. "The good
    news is that home builders appear to be ramping up production. More new homes for sale could gradually ease the supply and
    affordability constraints that many prospective buyers are experiencing right now.”

    October 27, 2020

    Has the Affordability Boost From Falling Mortgage Rates Run its Course?

    By Mark Fleming, First American Economic Insights - Throughout 2020, falling mortgage rates have been the strongest influence
    on housing affordability trends, even helping fuel the housing market’s impressive recovery and resilience to the continuing economic
    fallout from the coronavirus pandemic. Mortgage rates began declining in January 2020 and even dropped below 3 percent for the
    first time ever in August. But, as mortgage rates have fallen and the housing market has recovered amid strong demand and
    historically low supply, nominal house price appreciation has rapidly accelerated. In August, the dynamics powering affordability may
    have reached a tipping point.

    “You can only buy what you can afford to pay per month. In August, rising demand for homes against limited supply accelerated
    house price appreciation, which overcame the affordability boost from rising house-buying power for the first time in 2020.”

    The End of the Great Mortgage Rate-Powered Affordability Boost?

    Understanding the dynamics that influence consumer house-buying power – how much home one can buy based on changes in
    income and interest rates – provides helpful perspective on the housing market. When incomes rise, consumer house-buying power
    increases. When mortgage rates or nominal house prices rise, consumer house-buying power declines. Our Real House Price Index
    (RHPI) uses consumer house-buying power to adjust nominal house prices, offering insight into affordability.

    For example, according to our RHPI, real house prices decreased 5.7 percent year over year in August, marking a gain in affordability
    compared to a year ago. However, August also marks the first time since December 2019 that the RHPI increased on a month-over-
    month basis, indicating a more immediate-term decline in affordability, albeit small at 0.15 percent. Relative to July 2020, mortgage
    rates fell by 0.08 percentage points and household income increased by 0.27 percent. While these two forces improved house-
    buying power, it was not enough to offset the negative impact from nominal house price appreciation, which increased by 1.5 percent
    between July and August. Ultimately, this “tug-of-war” between house-buying power and nominal house prices determines the fate of
    real house prices, and this month, nominal house price appreciation won.

    Nominal House Price Appreciation Outpaces Mortgage Rate and Income Growth Bump in August

    From July 2020 to August 2020, nominal house prices increased by 1.5 percent, reducing affordability. In July 2020, the median
    household income was approximately $71,180, which could purchase a home valued at $487,750, assuming a five percent down
    payment. That home increased in value by 1.5 percent to roughly $494,900 in August, an increase of $7,155.

    According to our RHPI, the 0.08 percentage point decline in mortgage rates from July 2020 to August 2020 translates to a $5,087
    improvement in house-buying power. As rates have fallen, household incomes for those who are still employed continued to rise
    modestly. In August, the growth in household income increased consumer house-buying power by an additional $1,293. The
    combined effect of falling rates and rising household income in August was a $6,380 increase in house-buying power. The $7,155
    increase in the home’s nominal price outpaced the $6,380 increase in house-buying power, so the prospective homebuyer lost
    approximately $775 in purchasing power between July and August 2020.

    Does the Tipping Point Signal a Shift in Affordability Trends?

    Focusing on nominal house price fluctuations alone as an indication of changing affordability, or even the relationship between
    nominal house price growth and income growth, overlooks what matters more to potential buyers – house-buying power. You can only
    buy what you can afford to pay per month. In August, rising demand for homes against limited supply accelerated house price
    appreciation, which overcame the affordability boost from rising house-buying power for the first time in 2020.

    The good news is that affordability remains significantly higher than one year ago, mostly due to falling rates. One month does not
    make a trend, but this month’s decline in affordability signals that the current dynamics producing faster house price appreciation may
    begin to erode the affordability gains of recent years.

    For more analysis of affordability, please visit the Real House Price Index.

    October 16, 2020

    Why Housing Market Potential Remains at 13-Year High Point

    By Mark Fleming and Odeta Kushi, First American Economic Insights -- The housing market’s impressive “V-shaped” recovery
    has thus far shown significant resilience to the economic impacts of the coronavirus pandemic. Demographically driven millennial
    demand has continued unabated, low rates have fueled house-buying power, and historically low inventory has increased
    competition, leading to rising prices.

    “In the game of housing musical chairs, it’s clear the housing market needs more chairs.”

    Weekly mortgage applications started the first quarter of the year approximately 10 percent above year-ago levels. After reaching a
    pandemic-induced low point in April, mortgage applications began to accelerate and, starting in late May, have surpassed their levels
    from one year ago for 21 straight weeks. In September, housing market potential continued to impress, even outpacing last month’s
    record. Housing market potential increased to its highest level in over 13 years, largely driven by strong house price appreciation in

    Housing Musical Chairs Boosts Market Potential

    In today’s housing market, fast rising demand against the limited supply of homes for sale has resulted in faster house price
    appreciation. There were 1.49 million homes for sale at the end of August, down 18.6 percent annually to a 3-month supply. Homes
    that do come to market are often met with multiple bids, further escalating prices, but are still selling quickly. The rapid escalation of
    house prices has a mixed impact on home buyers, fueling strong equity gains for existing homeowners, but dampening affordability
    for potential first-time homebuyers.

    Homeowners in areas where house prices are rising feel wealthier. American homeowners today have near-record levels of equity,
    and as their equity grows, they are more likely to consider using that equity to purchase a larger or more attractive home – the wealth
    effect of rising equity. In August’s existing-home sales report, the increase in home sales was strongest at the upper end of the
    market, as sales of homes priced at more than $1 million rose 44 percent nationally, followed closely by homes in the $750,000 to $1
    million range, which increased 34.5 percent. Existing homeowners are playing “housing musical chairs” by selling to each other. In
    September, the growing wealth effect of rising equity caused by house price appreciation increased housing market potential by
    26,570 potential home sales relative to one month ago, and 129,430 compared with one year ago. Accelerating house price
    appreciation had its greatest year-over-year contribution to the market potential for existing-home sales since 2014.

    What’s Ahead for First-Time and Repeat Buyers?

    Inventory in today’s housing market is so tight and demand so strong that in last month’s existing home sales report, 70 percent of all
    homes listed for sale were sold within the month, with days on market falling to 22 in August, down from 31 days in August 2019. The
    ongoing supply shortage continues to put upward pressure on house price appreciation as buyers compete to buy what little
    inventory is for sale. You can’t buy what’s not for sale, but you can compete for what is.

    The lack of inventory and increase in house price appreciation is problematic for potential first-time home buyers, who tend to be
    younger and do not have the equity from the sale of an existing home to bring to the closing table. On the contrary, existing
    homeowners can use the equity from the sale of their current home to purchase a bigger or better home. Rapid house price
    appreciation and its impacts on existing and first-time home buyers will persist until the supply and demand imbalance begins to
    improve. In the game of housing musical chairs, it’s clear the housing market needs more chairs.

    September 2020 Potential Home Sales

    For the month of September, First American updated its proprietary Potential Home Sales Model to show that:

  • Potential existing-home sales increased to a 6.09 million seasonally adjusted annualized rate (SAAR), a 1.5 percent month-
    over-month increase.
  • This represents a 74.6 percent increase from the market potential low point reached in February 1993.
  • The market potential for existing-home sales increased 11.8 percent compared with a year ago, a gain of nearly 641,367
    (SAAR) sales.
  • Currently, potential existing-home sales is 704,586 million (SAAR), or 10.4 percent below the pre-recession peak of market
    potential, which occurred in April 2006.

    Market Performance Gap

  • The market for existing-home sales underperformed its potential by 2.5 percent or an estimated 151,322 (SAAR) sales.
  • The market performance gap decreased by an estimated 123,475 (SAAR) sales between August 2020 and September 2020.

    What Insight Does the Potential Home Sales Model Reveal?

    When considering the right time to buy or sell a home, an important factor in the decision should be the market’s overall health, which
    is largely a function of supply and demand. Knowing how close the market is to a healthy level of activity can help consumers
    determine if it is a good time to buy or sell, and what might happen to the market in the future. That is difficult to assess when looking
    at the number of homes sold at a particular point in time without understanding the health of the market at that time. Historical context
    is critically important. Our potential home sales model measures what we believe a healthy market level of home sales should be
    based on the economic, demographic and housing market environments.

    About the Potential Home Sales Model

    Potential home sales measures existing-home sales, which include single-family homes, townhomes, condominiums and co-ops on a
    seasonally adjusted annualized rate based on the historical relationship between existing-home sales and U.S. population
    demographic data, homeowner tenure, house-buying power in the U.S. economy, price trends in the U.S. housing market, and
    conditions in the financial market. When the actual level of existing-home sales are significantly above potential home sales, the pace
    of turnover is not supported by market fundamentals and there is an increased likelihood of a market correction. Conversely,
    seasonally adjusted, annualized rates of actual existing-home sales below the level of potential existing-home sales indicate market
    turnover is underperforming the rate fundamentally supported by the current conditions. Actual seasonally adjusted annualized
    existing-home sales may exceed or fall short of the potential rate of sales for a variety of reasons, including non-traditional market
    conditions, policy constraints and market participant behavior. Recent potential home sale estimates are subject to revision to reflect
    the most up-to-date information available on the economy, housing market and financial conditions. The Potential Home Sales model
    is published prior to the National Association of Realtors’ Existing-Home Sales report each month.

    The increase of e-mortgages purchased by Fannie Mae and Freddie Mac spiked significantly over the first six months of 2020, the
    Federal Housing Finance Agency (FHFA) reported.

    In a September white paper, the FHFA reported that e-mortgages comprised 4.25 percent of all single-family mortgage purchases
    made by the Government Sponsored Entities (GSE) during the first half of the year. This accounted for $38.8 billion in mortgages.

    Fannie Mae and Freddie Mac attributed the spike to the COVID-19 pandemic in 2020. The FHFA reported that lenders have
    accelerated their e-mortgage implementation plans because of social distancing requirements and borrowers’ desire to conduct
    business remotely.

    “As a Fannie Mae official explained, the COVID-19 crisis put e-mortgages front and center, and lenders began to realize some of the
    benefits, such as speed and efficiency,” FHFA noted.

    in the face of the COVID-19 pandemic, a number of jurisdictions have implemented emergency or permanent orders relaxing
    notarization laws, including allowing remote online notarizations (RON) in those areas. In addition, the GSEs have extended temporary
    loan measures, including the use of RON.

    The FHFA reported the GSEs expect e-mortgage purchases to increase during the second half of 2020 and 2021. Its estimated that
    e-mortgages will represent 5 percent of total GSE volume by the end of the year.

    GSE officials said longer-term expansion could be impeded because e-notarization (including RON) was not available in all 50 states.
    Additionally, despite initiatives and orders allowing for RON, an official with Freddie Mac said the number of notaries certified and
    available to act as electronic notaries is low.

    Use of e-mortgages carries both risk management benefits and potentially heightened risks.

    Both the GSEs said e-mortgages offer fewer signing errors and ensure that documents, pages and signatures are not missing from
    the closing package, which minimizes post-closing review delays.

    Other benefits noted in the report include:

  • may reduce the need for settlement provider and lender back office teams to perform quality post-closing reviews for missing
    signatures and unsigned documents and can help minimize efforts associated with trailing documents.
  • GSE systems can automatically certify the loan when it is delivered by verifying that all the information in the note, such as loan
    terms and property information, matches the loan delivery data.
  • Eliminating the need to physically transfer a note improves efficiency, reduces costs and eliminates the risk that it will be lost.
  • Borrowers can review and electronically sign some documents before the closing, making the closing faster and easier.
  • While underwriting parameters are the same for an e-mortgage versus a traditional paper-based mortgage, differences for
    signing processes introduces potential risk.

    According to Fitch Ratings, e-mortgages can increase risk if counterparties do not have proper controls and remediation plans for
    their e-mortgage systems and platform. For example, Freddie Mac told FHFA that if counterparties do not comply with the Electronic
    Signatures in Global and National Commerce Act (ESIGN) and the Uniform Electronic Transactions Act (UETA) in the e-mortgage and
    e-closing processes, then the resulting e-mortgage may have issues or delays in enforcement. According to Freddie Mac, the
    potential for enforceability issues with e-mortgages is their highest risk.