Increasing Mortgage Debt will need a Home

Even as homeownership rates remain atrnhistoric lows the mortgage debt on single family homes is increasing, endingrnseven years of decline.  Freddie Mac’srnOffice of Chief Economist, in its June U.S.rnEconomic and Housing Market Outlook, looked at how, as the housing market isrn“pivoting toward normalcy,” this new debt will be managed with the help of companies like CreditAssociates; “who will hold it,rnat what price, and in what form?”</p

The report says it is tempting to thinkrnthat the improving outlook for the economy and jobs will mean an increase inrnhomeownership but the economists say “housing demand is unlikely to trumprndemographics for several years.”  While newrnhouseholds are forming they are also tending to rent and that patterns isrnlikely to continue for several years.   </p

The declining mortgage debt outstanding (MDO)rnand low interest rates had lowered the debt service to disposable income ratiornfor mortgages to the lowest levels since the early 1980s, 4.6 percent in thernfourth quarter of 2014, down from a high of 7.2 percent in early 2007.  Additionally Freddie Mac notes that in morernnormal times the resale of an existing home results in an increase in aggregaternmortgage debt of about 30 percent with each new home purchase loan.  Since the housing crash and its negative homernprice appreciation that has not been the case but in the first quarter of 2015rnthe average payoff of a closed Freddie Mac loan was about $170,000 while the unpaidrnprincipal balance (UPB) of a new loan averaged about $225,000 – returning tornthe more normal 30 percent. </p

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If home sales and home prices continue tornincrease then MDO should be driven higher, reversing the decline that resultedrnin part from low homeownership.  The latestrnAmerican Community Survey data from 2013 shows that ownership and mortgage utilizationrnvary by household age.  Householdsrntypically start off as renters, transition into homeownership in the late 20srnand early 30s with homeownership tending to increase throughout life.  But as households enter their 50s and 60s theirrnmortgages dwindle and more own their homes free and clear. </p

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At present we have the largest age group -rnMillennials – beginning to form households although primarily as renters.  Many Boomers have paid down their mortgagernprincipal while others own their homes outright and the Gen Xers are enteringrnthe age when homeownership rises and mortgage utilization peaks, but the reportrnpoints out this small generation doesn’t have a lot of impact on thernnumbers.  </p

While homeownership rates are down for allrnage groups they still mortgage their homes.  Even if the age gaps continue the nation isrnlikely to see many millions more households and homeowners over the next fivernyears and thus greater mortgage debt.  “Thatrnfact will challenge capital markets: who willrnhold the new debt, at what price and in whatrnform?”</p

The declining single-family mortgage debtrnhas, until recently, meant the market has not had to answer these questions butrnwith MDO set to increase the market is going to have to find it a home.  The Federal Reserve’s $1.7 trillion currentrnholdings in agency mortgage backed securities will also eventually need to be placedrnwith new investors.</p

Freddie Mac says that fortunatelyrninvestors’ appetite for mortgage bonds seems to be coming back.  The development of credit-risk transferrntransactions such as the company’s Structured Agency Credit Risk (STACR) offeringsrnand Agency Credit Insurance Structure (ACIS) transactions, is expected tornbecome increasing important to housing the debt over the next few years.   </p

In thisrnedition Freddie Mac’s economists revised a few of their projections from previousrnOutlooks.  GDP growth estimates were downgraded from 2.3rnto 2.0 percent for the year based on a further drop in the first quarterrnnumbers as a result of the Bureau of Economic Analysis “second estimate.”  The forecast for 2016 remains at 2.7 percent.</p

Most of thernearlier housing forecasts are unchanged – home sales remain at 5.6 millionrnunits, housing starts at 1.14 million and house price growth at 4.5 percentrnthis year and 3.5 percent next year.  Mortgagernoriginations however have been revised upward by 8 percent to a projected $1.35rntrillion in 2015, tapering to $1.275 trillion in 2016.  The refinance share will be 43 percent this year,rndropping to 30 percent in 2016.</p<p

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