The Incredible Shrinking Mortgage Market

Yomanimus

Making money in real-estate is all about timing. Despite the fact that many people lost not only their shirts but their homes in the mortgage meltdown, real-estate has historically been considered a safe investment. But if current trends continue, there may be more bust than boom. In fact, we may never see a mortgage market as booming as it was during during the early 2000’s. In addition to the flood of new homeowners, the housing boom saw an unprecedented number of speculators acquiring multiple properties, hoping to capitalize on ever-increasing housing prices. The combined effect of all this activity was a mortgage market of tremendous size – roughly $10 trillion in residential mortgages by late 2007, which equates to nearly a quarter of the total debt market in the US. But every boom eventually busts, and since ’07 the mortgage market has shrunk into a shell of its former self.

It should here be noted that the shrinking mortgage market is not only, or even primarily a US problem. BBC News reported in November 2008 that it was likely that, “…net new mortgage lending – gross new home loans minus repayments and redemption – would fall below zero in 2009 and see only a modest recovery in 2010.” These remarks were made following 2007 where net new mortgage lending stood at £108bn. Similarly, the UK’s Independent reported the findings of a study by Nationwide predicting that, “…the UK mortgage market will contract by 80% this year [2009],” and also that, “…house prices will fall for another 12 months.” Nationwide group development director Tony Prestedge estimated the total value of the mortgage market to be £18bn in 2008, compared with £90bn in 2007. Both estimates reach the same chilling conclusion of a drastically shrinking market.

The effects on the US market have, of course, been more prominent in the news. While the recent lowering of interest rates has spurred some activity, HousingWire.com recently reported that the number of mortgage applications filed in the week ending September 25 declined 2.8%, “…on a seasonally adjusted basis”, citing the Mortgage Bankers Association’s survey that measures total gross applications in the US. The refinancing index is also said to have decreased (albeit only by 0.8%) while the purchase index fell 6.2%. Another weekly survey, Mortgage Maxx, reached similar conclusions. After adjusting to “account for multiple submissions by the same borrower”, Mortgage Maxx found that total applications declined by 7.3% in the same week.

Casey Serin

Trouble began brewing before this year, however. According to BuilderOnline.com, 1 in 3 mortgage applicants was turned down in 2008 (a 32% denial rate) the same year that total mortgage applications were down by a third from 2007 and at less than half of 2006 levels. Even such mortgage activity as took place was largely of the government-backed variety. According to BuilderOnline, “…loans backed by the Federal Housing Administration soared to 21 percent of all loans made last year [2008] from less than 5 percent in both 2005 and 2006.”

The fallout from the housing bust has even affected tiny countries thought to be irrelevant to a crisis originating in the US. Bulgaria, for instance, saw the size of its mortgage market shrink twenty times in the first two months of 2009, according to Novinite.com. Only BNG 18 M was invested during January and February, as opposed to the BGN 355 M that was invested during the same months in 2008.

WoodleyWonderworks

All in all, the housing bust and the recession that followed have made for tough times in the mortgage market. Because mortgage-backed securities were packaged and sold to investors all over the world, what began as a US problem is very much an international problem with international repercussions. The silver lining (if there is any) may be found in the aforementioned recent lowering of loan interest rates to below 5%. As Reuters reported on October 7 2009, new mortgage applications are at a four month high. As a “tentative early indicator of sales”, these numbers may hold promise for the mortgages Nevertheless, substantial growth remains to be seen.