Trends in Building and Lending - Owning Less Expensive Than Renting in How Many States?
All the housing statistics this week made my head spin. How good would you be at building your own house? Here’s a short 10 question quiz that will see if you're up to it. (Hint: it helps if you know what a stud is.)
Here's something new in the builder world, besides a lack of buildable land and difficulty finding skilled workers: the board of directors at Pulte Homes changed, adding members due to shareholder activism. Yesterday the Atlanta-based home builder reported that second-quarter profits grew 14 percent from last year on a 41 percent gain in revenue. But arguably of more interest PulteGroup also announced an agreement with New York hedge fund Elliott Management, which built a 4.7 percent stake in the company. "While it is unfortunate that it took my actions - and one of the world's leading activists - to drive value at PulteGroup over the last several months, I am encouraged by the initial shareholder victories that were announced today," said retired founder William J. Pulte. Pulte has waged a public battle against the company since April and helped force Chief Executive Richard Dugas Jr. into early retirement.
Along those lines, the NAHB Home Builder Optimism Index slipped to 59 in July from 60 in June. And despite July's slip, optimism remains relatively high, though it hasn't hit the post-recession high of 65 last October. "The economic fundamentals are in place for continued slow, steady growth in the housing market," opined NAHB's chief economist, Robert Dietz. "Job creation is solid, mortgage rates are at historic lows and household formations are rising. These factors should help to bring more buyers into the market as the year progresses."
Yet it seems that building permit delays are choking the U.S. housing supply. And as you'd expect, developers & builders are responding less quickly with new units in metro areas with long waits. Just take a look at places like Denver, San Francisco, Nashville, Austin, etc.
Of course the basic laws of supply and demand dictate that as the demand for housing ramps up, due to immigration and household formation, and supply is not ramping up, prices will increase. Sure enough, the press is telling us that it is less expensive to own a home in 42 states than to rent. (Thanks to Guy S. for sending that story along.)
Ellie Mae's June Origination Insight Report showed purchase loans making up the highest share of new closed loans since August 2014. Of the loans that passed through Ellie's system, the share of purchase originations hit a near two-year high in June. Purchases represented 65 percent of all loans that were closed during the month, up from 62 percent in May and the highest percentage since August 2014. Eighty-five percent of FHA originations were for purchase mortgages as well. "FHA purchases are also on the rise, representing 85 percent of closed FHA loans, the highest percentage since September of 2014."
Lenders are certainly watching trends in the market, and theories on lending: rent versus buy, millennial homeownership, and urban versus suburban. Here's an article on all three! My imagination runs wild when I read stories like this. For starters, I love the idea of so-called "second tier cities" becoming the "cool" place to be. In the digital age, we can start companies anywhere and attract employees on culture and building their own lives. I think this is great for cities like St. Louis and Pittsburgh mentioned in the piece, but also Charlotte, Detroit, Hartford, and Milwaukee.
Lenders also start to salivate when they read things like "Nationally, home ownership is near a 48-year low." Not because that's good news but because it feels like we're so close to a surge. It feels like an opportunity. Along those lines, there is a massive conversation going on in the country right now about what we want our communities to look like, how opportunity should unfold for all Americans, and what that means for jobs and the economy. Depending on how that turns, coupled with low interest rates, we have the potential for a perfect storm of growth. Admittedly, there are some significant challenges and hurdles, but it almost feels like there is an undercurrent of transformation that means good things for all people including an expansion of economic opportunity.
Many experts believe, however, that the biggest threat to this expansion is the gap between rich and poor - that we cannot grow all our communities and return home ownership to a 48 year high without including everyone in the growth. Increased cost(s), whether that's regulatory burden or limited access to credit, is also a threat to this expansion. Hopefully, we can continue to encourage the creative thinking associated with the success of technology companies recently and apply it across the board in many (if not all) industries.
Lenders are certainly licking their chops over news like that, and sure enough most lenders are doing pretty well volume & profit-wise. The Office of the Comptroller of Currency (OCC) knows a thing or two about accounting and metrics. Bank officers everywhere took note earlier this month when the OCC released its periodic report on mortgage lending.
For the second quarter of 2016, most analysts are expecting higher mortgage volumes versus the 1st quarter and increased gain-on-sale margins. The early read-across from mortgage banking results of the big banks appears "slightly lower than expectations" from a volume perspective, with volumes up about 30%. Gain-on-sale margins have been up nicely for most large banks, a positive read-through to the rest of the group. The question is, can earnings and results from originations make up for the big losses suffered from mark-downs in mortgage service rights (MSR), also factored into GAAP estimates for mortgage servicers.
Sure enough, the "experts" who have been predicting the end of refinances predicted incorrectly. Just as mortgage bankers were preparing for the end of a historic boom driven by low interest rates, borrowers have begun knocking at their doors again with rate & term refis. And in earnings reports JPMorgan Chase & Co JPM.N, Wells Fargo & Co WFC.N and Citigroup Inc C.N said they originated $94 billion worth of new mortgages during the second quarter in their core mortgage operations, an increase of $23 billion, or 31 percent, over the first quarter.
Rates are certainly great, and with mortgage rates near historic lows, and volumes still strong in the early days of the third quarter, banks predict the trend will continue, providing a bright spot in a low-rate environment hammering their wider results. JPMorgan has added more than 1,000 employees this year to handle the swell in mortgage business, said Mike Weinbach, its chief executive of mortgage banking. He believes U.S. lenders will make about $1.8 trillion of mortgage loans this year, 40 percent more than he had expected at the start of the year.
For the big banks, mortgage banking makes up a small piece of the overall revenue pie. There are cross-selling opportunities, of course, but in general banks were looking forward to rates increasing in order to increase profits. Though low rates bring in new mortgage business and deliver fees from refinancing, banks are hard pressed to generate substantial income when rates fall too low. And don't forget that US banks' cost of funding has also risen. The difference between what banks pay for U.S. dollars and what they're earning is pretty slim, pressuring margins.
At some point, there is little room left between what it costs banks to obtain funds and what they can earn from lending and investing. Rates on short- and long-term debt (often measured by the yield curve) have come closer together, leaving banks with razor thin margins almost regardless of the type of funding or loans they pursue. Wells, JPMorgan and Citigroup each talked about low rates as the main hurdle to producing better results. Their second-quarter profits fell 3.5 percent, 1 percent and 14 percent from a year earlier, respectively.
Concerns about market volatility and apparent weakness in the U.S. economy earlier this year, combined with Britain's vote in June to exit the European Union have made it much less likely the Fed will raise rates further in the near-term. So if you like rates where they are, you'll like them for a while. And this week volatility quieted back down.
The bond market has been darned quiet all week - which is just fine for plenty of capital markets staffs and LOs trying to close loans in July. Up a little, down a little, and yesterday was up a little as global markets faced a bout of risk aversion. We did have some news, and it was mostly in line with expectations and were largely consistent with a rebound in U.S. growth in the second quarter: initial jobless claims remain near historic lows, the Philadelphia Fed's diffusion index of manufacturing activity disappointed economists' forecasts but the internals of the report were rather strong, Leading Indicators continued to improve, and existing home sales came out just above expectations.
Are you looking for some bond market-moving data this morning? Good luck. There is none scheduled, but we're off a little nonetheless. Thursday the 10-year yield ended at 1.56% and this morning it is 1.59% (worse .25 in price) with agency MBS prices down/worse about .125.
Jobs and Announcements
In operations job news, Benchmark Bank - Home Loan Division is seeking experienced residential mortgage underwriters to join its dynamic team. "The Benchmark family of companies is consistently named a Best Place to Work and offers a competitive compensation package including excellent benefits. Benchmark Bank - Home Loan Division has locations throughout Texas, however highly qualified individuals may have the opportunity to work remotely." For more information or to submit your resume please email SVP of HR Carlene Towb.
In technology job news, CalyxSoftware is looking for a few mortgage lending professionals wanting to change direction toward product management and design for its PathSoftware division. PathSoftware is Calyx's new cloud based LOS for mid to enterprise level financial institutions. "These positions play a critical role in developing and executing against the PathSoftware roadmap and Calyx sources say they would rather take a knowledgeable mortgage industry professional and teach them product management than vice versa. Ideal candidates live in the California Bay Area, have mortgage industry experience (but not just as a loan processor) and want to make a change to the technical side of the business. Questions and resumes should be directed to Jo Baker (214-252-5645).
In loan originator education news, "We are over halfway through 2016, and that means another year of CE for all you MLOs. I know that CE requirements for both state and federal have been the bane of the existence of most MLOs, but there is one company that is trying to change the way the mortgage industry takes their CE. Ken Perry, and his team over at The Knowledge Coop have been creating CE courses from the beginning, and are trying to revolutionize the industry, offering both online and live federal classes across the country. The obvious goal of the classes is to educate, but they are also creating content and conversations aimed at engaging with the mortgage community beyond the classroom. Check out some of their upcoming live events: Spokane, WA, Austin, TX, Fife, WA, Wilsonville, OR, Irvine, CA, and San Ramon, CA. If you can't make a live event, you can call them directly for more info on their online courses at 800-936-2128.