More than seven years have passed since home prices peaked and the mortgage credit crisis began to unfold in 2006, and Barclays (BCS) Securitized Products Research says real recovery isn’t in the cards yet in its “The Future of US Housing” report.
Barclays analysts, rather optimistically, say that since 2011-12, there has been a sustained recovery in the housing market.
Prices have risen by 20-25% since bottoming in first quarter 2012, although a lot of that activity hasn’t been because of individual homeowners but rather institutional and investor buyers.
After peaking during the crisis years, existing and new home sale inventories have also fallen below pre-crisis levels.
During this period, the US home-ownership rate has given back almost all of the gains made during the mortgage credit boom of the 2000s.
Home ownership has dropped from its peak of around 69% to the mid-60% area, which is the same level as we saw in the 1970s recession.
Barclays is optimistic on housing, in a way that other analysts aren’t.
Barclays concedes that despite what recovery we have seen, housing finance is still dependent on government.
“Although the housing market has rebounded after working through the excesses prevalent prior to 2008, mortgage finance has not,” the Barclays report states.
Analysts note that the share of government guaranteed mortgages (Federal Housing Administration, Fannie Mae, and Freddie Mac) has remained above 80%, while the private securitization market has remained mired in legacy issues, and increasing bank capital charges and rep and warranty put-back concerns have restricted the ability of private capital to compete with government-backed loans.
So what does Barclays say you need to know about the future of housing?
1) The housing market is rebounding, but housing finance has not
Even as the US housing market has rebounded sharply in the past three years, housing finance has not. The extent of government involvement in mortgage lending poses unacceptable risks to the taxpayer. Bank portfolio lending, private-label securitizations, covered bonds, and public/private partnership models offer alternatives to reduce reliance on the government guarantee, but they all come with their own limitations.
2) Corker-Warner is the only likely GSE reform on the horizon
Among existing legislative proposals, the Corker-Warner bill is the most promising, and will likely be the template for any final legislation. It requires the first-loss piece to be backed by private capital but also provides an explicit government backstop in extraordinary circumstances. We estimate that $400-450bn of private capital is needed to absorb the credit risk of all $4-4.5trn in government- guaranteed GSE mortgages, assuming a 10% first-loss piece. The private markets cannot raise this amount easily. In our view, a government retreat will need to be spread over at least 10-15 years, not the five years proposed by Corker-Warner.
Click below for two more things Barclays foresees.
3) Lending to lower-credit borrowers will get harder
In addition to legislation, new Qualified Mortgage (QM) rules will make lending to lower-credit borrowers more challenging. Overall, in a new housing finance system, we expect rates to rise only marginally for clean credit borrowers, who currently account for more than three-quarters of originations. But lower credit borrowers could see rates rise by 50bp or higher. Mortgage credit availability is unlikely to worsen from current levels, even with new lending rules.
4) The best likely reform is years away
Passage of housing finance legislation might take a few more years. The longer it takes to pass a bill, the greater the likelihood that some version of the status quo will prevail. But even if the status quo does prevail, the market is likely to move to a situation similar to that envisioned by the Corker-Warner bill, assuming recent involvement and extent of taxpayer protection (both higher with legislation). In sum, a smooth transition to a new housing finance system (with lower government involvement) is possible as long as the transition occurs over an extended period and with a government backstop. But if Congress insists on a purely private solution, or a compressed timeframe for transition, mortgage credit and the US housing market could be impaired.
The Barclays report also looks at the various options that the US government has to reduce its footprint in housing finance. They also examine the amount of private capital that will ultimately be required and various ways in which it can be raised.