For the last few years at this time, HSH.com has detailed what we think are the most important factors that are expected to influence the mortgage and real estate markets in the coming year. The last few years have been turbulent and unpredictable to say the least; 2013 should be no different. In no particular order of importance, here are 10 issues bound to affect the markets in 2013.
No: 1: Refinances will dwindle
Already solid refinancing activity was goosed by perhaps 20 percent in 2012 by the expansion of HARP. According to the Federal Housing Finance Agency, more than 709,000 borrowers refinanced through HARP during the first nine months of 2012. HARP 2.0 essentially created a class of borrowers eligible for a nearly no-doc mortgage on properties which were not appraised, and to borrowers who didn't need to prove the amount of their income. Couple these looser underwriting standards with mortgage rates falling to new record lows and we’ve enjoyed a refi "boomlet" in 2012 as a result.
Those fortuitous market conditions seem unlikely to repeat in 2013; as a result, the available pool of borrowers who can successfully refinance at present interest rates (and in light of today's tight lending standards) will diminish. Refinances will shrink unless mortgage rates continuously decline (unlikely), a massive new government-backed refinance program is announced (unlikely), underwriting standards are significantly eased (highly unlikely), or the economy improves so quickly as to see battered credit scores or equity stakes restored to prerecession levels (also highly unlikely).
The result: Slower origination activity at times may increase competition for business among lenders and help lower rates.
No: 2: Recovery in home sales continues
Despite a strong market for rentals and still-wary consumers, we think 2013 will be a relatively good year for home sales. Rising rents are one component of the equation. At some point, the cost of renting a place to live becomes close enough to the cost of actually owning a home giving the renter a reason to consider a purchase instead. Kiplinger forecasts that average rents will rise perhaps 4.5 percent in 2013, and with the worst of the real estate downturn arguably falling behind us, more renters or live-at-homes will likely take the plunge and buy a home.
The Federal Reserve remains committed to getting people back into the market, and even with some signs of firming, home prices should remain attractive. It's hard to reckon a final figure for the year, but we should be close to five million sales in 2012. For 2013, probably five percent more or so should be expected.
The result: Fewer homes at rock-bottom prices, with a “seller’s market” forming in some areas of the country.
No. 3: Mortgages: Shorter terms and building equity
Obtaining shorter-term mortgages was a trend which formed in 2012 and should carry into 2013. While primarily a refinance-fostered phenomenon in 2012, the low-interest-rate environment might just see somewhat more homebuyers looking at 25- and even 20-year terms. This change is more likely to come from homebuyers in the trade-up market, where activity should start to improve as the economy slowly firms.
For other borrowers, rebuilding lost equity will continue to be a desire (if not a focus) and we think we'll continue to see both refinancing to shorter than 30-year terms as well as a move toward retiring mortgage balances more quickly though prepayment.
The result: Improving equity positions for many homeowners.
No. 4: Mortgage rates: More flat than not, overall
If we're right about several items noted here, mortgage (and other) interest rates should remain low and fairly stable through most of 2013.
The slow economy should produce some downward pull, especially in the post-cliff first-half of the year, and Federal Reserve policy should tend to keep them both low and generally stable throughout. A few considerations might push rates higher at times, including concerns about inflation as a result of the Fed's programs, some unease with regard to an impending change at the helm of the Federal Reserve, or an economy which shakes off the shackles of slow growth and begins to put in above-par performances for several quarters.
The result: The best borrowing opportunity in perhaps 60 years persists.
No. 5: Underwriting standards: Cracks appear
We believe that in 2013 we will see the first cracks in tough mortgage underwriting standards which have been in place for years. While the FHA program continues to suffer from poor-quality loans of 2007-2009, the GSE's book of business has been improving on balance for several years, and firmer market conditions suggest that will continue.
As such, we think that the first market-based add-on to mortgage prices--the Adverse Market Delivery Charge (ADMC)--will also be the first to go. The quarter-point ADMC fee first made its appearance in 2008 as a response to declining home values. With housing markets continuing to improve, and with home prices again firming in many locations, there are considerably fewer "adverse markets," and the fee will probably disappear (or be otherwise named) by the time 2013 comes to a close.
The result: A minor improvement in costs for mortgage borrowers.
No: 6: How much will QRM derail the market?
The Dodd-Frank Wall Street Reform and Consumer Protect Act was passed into law over two years ago, but a key component has yet to be defined, let alone enacted. Under the law, a Qualified Residential Mortgage (QRM) needs to be defined by the Consumer Finance Protection Bureau and put in place early in 2013. Loans failing to meet this definition will require that the party who securitizes the loan hold back a certain amount of cash should the loan default, while loans adhering to the rule will not require this, and can be sold freely to the secondary market.
Since it will eventually be required by law, the absence of the definition to date means private mortgage markets have been crippled. With a definition, they might also be crippled, since lenders may opt to use only the new standards by which to make loans, cutting less-qualified borrowers from the market completely (or only offering non-QRM loans at rates and fees as to make them unaffordable).
The result: Unknown. Investors may welcome the enactment of rules so that they can begin to "move on" and form new private markets, or they may simply decide to no longer offer mortgages that don't meet the new requirements.
No. 7: Economy: Dinged by cliff or agreement
Whether we fall off a steep fiscal cliff or merely slide down a ramp remains to be seen as this is being written. One thing seems certain, any combination of tax increases and government-spending cuts will have at least some economic impact. A "cliff" would likely toss the economy back into recession, while a compromise or agreement would probably see us skirt the two quarters of negative growth which defines an economic recession.
That said, the impact of these changes (and others slated to hit the economy in 2013) will serve to diminish growth to some degree. The strongest blast of government spending in three years pushed GDP to 2.7 percent in the third quarter of 2012, but the underlying pattern for growth is still quite weak. It won’t take much additional headwind to slow the economy to a rate virtually indistinguishable from recession for at least a portion of the year.
The result: The drag on growth may produce 2013's lowest mortgage rates.
No. 8: Fed changes at the top?
While Federal Reserve Chairman Ben Bernanke's term does not expire until 2014, it is thought that his present leaning is not to seek reappointment when his term expires. This should give markets room to speculate as to his possible replacement in 2013, and those markets may be swayed by how much any replacement believes (or does not believe) in the Fed’s unconventional monetary policies which have been the hallmark of Mr. Bernanke's tenure.
Given statements (if not firm commitments) to low-rate policies which will be in place well after 2014, any potential successor could disturb financial markets just by having his or her hat thrown in the ring. How much ease or unease the market will display will depend upon the candidate's previous commitment to (and comments about) unconventional Fed policies, open communication and forward guidance about interest rates.
The result: Unless Bernanke announces plans to stay on, there could be some market unease during times of speculation regarding his replacement.
No. 9: Fed policy: Operation Twist ends, something new starts
We think the Fed's present program of selling its short-term Treasury holdings in favor of buying long-term ones, called "Operation Twist," will come to an end as scheduled at the end of 2012, as the Fed has nearly exhausted its short-term holdings at this point.
However, we believe that the central bank will take a page from its own playbook, replacing Operation Twist with a commitment to buy new Treasury debt for an open-ended period and in an amount "up to" something approximating the size of Operation Twist, worth about $40 billion per month in 2012. In this way, the Fed can help keep long-term interest rates low, which in turn helps keep mortgage rates low and stimulates the housing market, if not the economy in total.
A half-trillion commitment though 2013 would certainly expand the Fed's balance sheet, but if the economy weathers the expected slow patch and begins to strengthen, the Fed could trim back the plan (hence the "up to").
The result: The Fed's in a bit of a box, but lower interest rates matter greatly to the recovery, and the Fed wants them to remain.
No. 10: GSE reform: Not in 2013...or maybe ever
The hot political fires to reform Fannie Mae and Freddie Mac have been waning, and will wane even further as we move beyond the housing crisis. Even now, losses have slowed; Freddie Mac has begun to regularly turn a profit again, and even Fannie Mae started to run in the black again in the second fiscal quarter of 2012.
Since the Treasury has exchanged its preferred stock in the institutions for all of their profits, the cash hole dug by the crisis will begin to fill more quickly, lessening the desire to reform the firms, and they will be contributing considerable sums back to the government before too long.
The importance of Fannie and Freddie in the maintenance and recovery of the housing market is indisputable, and we expect that they will be part of any conversations about systemically important firms which may occur in the coming year. Some kind of reform will eventually come as Fannie and Freddie's "private" investment portfolios (which caused the majority of losses) need to be reduced by 15 percent per year, but even that will take years to complete, and still leave them with $250 billion in holdings.
If they are making money, repaying their debts and maybe even kicking money into the Federal coffers, there's less reason to press reforms quickly.
The result: For good or bad, the mortgage market will continue to be dominated by the GSEs.
After a number of truly difficult years, the housing market began to turn in 2012, and 2013 should provide a continuation of that trend. Home sales and home prices should continue their modest upward trends, while refinancing may begin to slow as there become fewer borrowers who want or need to refinance. Mortgage rates should remain low and favorable, perhaps setting new records at times, and the reform of mortgage markets should finally get underway (the GSEs excluded). With an active Federal Reserve to watch, and perhaps the first signs of underwriting standard moving more toward “normal,” it should be an exciting, interesting year.
A 25-year expert observer of the mortgage and consumer debt markets, Keith Gumbinger has been cited in thousands of articles covering a wide range of consumer finance and economic topics in outlets ranging from the Wall Street Journal to the Bottom Line newsletters. He has been a featured guest on national broadcasts for CNN, CNBC, ABC, CBS and NBC television networks and has been heard on NPR and other national and local radio programs. Keith is the primary researcher and writer for HSH.com's MarketTrends newsletter and has authored or co-authored a number of consumer guides on mortgages, home equity, refinancing and more.