WASHINGTON – It’s well established that mortgage lenders will need to look to new areas of growth as rising rates end the refinancing boom. But the interest rate environment may not be their biggest obstacle.
Lenders have so far been able to sidestep the continuing shortage of housing supply in the United States, in part thanks to lower rates. Still, many are worried that low inventories could soon put a strain on the sector and force financial institutions to compete even more intensely for new mortgage business.
The US housing supply was nearly 4 million homes below total demand at the end of 2020, according to Freddie Mac, a 52% larger deficit than in 2018. Redfin’s tracking has said on Monday that the total number of US homes for sale was down from a year ago. there are by the same percentage, totaling 634,817 houses.
The weak housing supply at the moment appears to be relatively behind for Congress and financial services regulators, but many experts agree that the rate hike could lead to new impetus for new federal policies to expand construction. housing.
“Even prudential regulators get the message,” said Ed Gorman, community development manager at the National Community Reinvestment Coalition. “They are getting the unambiguous message from communities and bankers that we really need to pay attention to stocks.”
A report released earlier this month by Freddie Mac highlighted how the supply of startup homes in particular has declined over several decades. In the 1980s, the average annual supply of new entry-level homes fell by 100,000 units to 314,000. It fell to 207,000 new entry-level units per year over the years. 90, 150,000 in the 2000s and 55,000 in the 2010s.
“In the space of five decades, entry-level construction has grown from 418,000 units per year in the late 1970s to 65,000 in 2020,” says the report, written by Sam Khater, vice president and Freddie Mac’s chief economist for economic and real estate research. .
The lack of housing supply has fueled an ultra-competitive real estate market, which Gorman said he experienced firsthand when he recently put his house up for sale. The offers were all above asking price and several of them did not have funding contingencies, meaning the offer was not dependent on the borrower’s ability to secure a loan.
“This is a problem that has been in the works for over a decade and it will take us a considerable amount of time to resolve it, ”said Gorman.
For lenders, the scarcity of available housing means fewer mortgages. Although most lenders have been bolstered by the refinancing boom resulting from the sharp cut in mortgage rates last year, rates are expected to rebound in 2021 and refi requests are already 20% lower than last year. .
The Mortgage Bankers Association signaled a rebound in refi activity this month as mortgage rates fell, but most industry watchers expect a slowdown.
“At some point you’re going to hit an upper bound, and that’s why supply share is really the root of the problem,” said Pete Mills, senior vice president of residential policy at the MBA. “We need more housing.”
While lenders are probably more affected by the mortgage rate environment than home sales, to the extent that they are in a hurry to buy is because of the lack of supply, said Shea Pallante. , President of Sprout Mortgage, a lender for unqualified mortgages. .
“If some lenders have been affected by buying activity… it’s because of low inventory,” he said. “The number of buyers versus the number of sellers is completely different.”
The refinancing boom has essentially been a dressing up of the supply problem for lenders, Gorman said.
“I think it would be hard to find someone in the mortgage industry who doesn’t see what’s going on in the market and wonders what the impact will be on them now, in six months, in a year and so on. of the. , because the refinancing boom will run out, ”he said.
The shortage of inventory can be attributed to a number of factors: the rising cost of lumber, a labor shortage, severe local zoning restrictions and the slow recovery of the residential construction industry after the 2008 financial crisis.
But tackling the roots of the problem has proven difficult for policymakers.
“From a political point of view, I don’t know how to get people to sell more houses and how to build houses faster,” Pallante said.
In particular, it has been difficult to tackle local zoning restrictions – such as the size of a house or what features it should have – has been difficult to tackle at the federal level.
“The challenge is that the most effective solutions are often those of states and local governments,” Mills said. “In some cases, like in a state like California, you have lots of regional intergovernmental groups, like air quality management districts and lots of conflicting overlays that create significant barriers to new construction.”
Policymakers discussed additional financing mechanisms to boost construction of affordable housing. For example, a proposal introduced at the last Congress would have used part of the guarantee fees charged by Fannie Mae and Freddie Mac to put more money into the Housing Trust Fund. The fund provides states with resources to build, maintain and operate affordable housing for very low income households.
In March, the Federal Housing Finance Agency announced that it was allowing Fannie and Freddie to disburse just over $ 1 billion to both the Housing Trust Fund and the Capital Magnet Fund.
“The record rise in house prices last year has exacerbated the affordable housing shortage. To help increase the supply of affordable housing in our communities, the FHFA remains committed to supporting the Housing Trust Fund and the Capital Magnet Fund “said Mark Calabria, director of the agency. .
President Biden included a $ 5 billion plan in his infrastructure package that would offer grants to local governments in exchange for easing zoning restrictions.
This could be particularly useful for low-income communities that need grants to fund new infrastructure, like roads or schools, said Buzz Roberts, president and CEO of the National Association of Affordable Housing Lenders.
“This is a plan that would very substantially rehabilitate around half a million homes over 10 years, targeted at these neighborhoods, as part of a broader strategy to stabilize and revitalize these neighborhoods”, a- he declared.
The Biden administration understands that the housing supply could hinder its goals of closing the wealth gap, Gorman said.
“Their infrastructure plan clearly signals an understanding of the need for the federal government to encourage local governments to change their zoning to become less restrictive,” he said.
The Senses. Amy Klobuchar, D-Minn., Rob Portman, R-Ohio, and Tim Kaine, D-Va., Have introduced legislation to create a $ 300 million fund by the Department of Housing and Urban Development that would offer grants to help local and state governments reduce barriers to housing construction.
Separately, Senator Elizabeth Warren, D-Mass., And other Democratic lawmakers in the House and Senate have proposed a bill providing for the construction and rehabilitation of nearly 3 million housing units during the next decade and put $ 10 billion in a grant program to get communities to remove heavy zoning restrictions.
As housing becomes more expensive for younger, lower-income and minority homebuyers, the supply shortage may become hard for lawmakers to ignore, experts say.
“I think as the housing affordability crisis grows you will see policymakers, by virtue of politics alone, forced to tackle the problem,” said Jerry Howard, CEO of the National Association of Home Builders, in an April 19 edition Mortgage Insurance Policy Arch
Lenders are likely to become more involved in finding solutions, Gorman added.
“Traditionally, the people who fund don’t necessarily see themselves as responsible for the underlying product they’re funding, in a sense,” he said. “They benefit from it, but they don’t think they need to actively engage in housing production.”
Still, Gorman said he “would be surprised if mortgage lenders didn’t see the need to engage in this area more robustly.”
“I have seen just even in the past six months a level of recognition of the problem that I had not seen a year or more ago,” he said. “I think it’s starting to take hold, but I think we’re still a long way from it.”
The meager inventory has not yet hampered lenders. But the ability to offer more loans could be good for business regardless, Roberts said.
“Lenders cannot make loans on homes that don’t exist,” he said.