Here’s what mortgage lenders should takeaway from rising home prices

Where is business likely to grow?

With rising home prices seemingly on a never-ending trajectory, lenders are left to adjust how they do business to ensure they stay competitive and profitable.

The latest S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index showed home prices up 6.1% annually in August, up from 5.9% in the previous month. And this is already after a long line of increases in home prices.

In an interview with HousingWire over the new report, Genworth Mortgage Insurance Chief Economist Tian Liu explained what rising home prices mean for lenders.

“From a lender’s perspective, they are looking at every opportunity to increase their volume,” said Liu.

He explained that lenders will likely see an increase in their purchase loan size thanks to rising home prices.

But at the same time, he said they’ll likely see a drop in purchase loan growth.

As it stands, the Mortgage Bankers Association projects 2018 purchase originations to reach $1.167 trillion, a 7.3% increase from 2017. Overall, the MBA expects mortgage originations to decrease to $1.597 trillion in 2018, from $1.688 trillion in 2017.

This means competition in the market between lenders will be tight and increases in home prices only adds to this.

There is a positive side though. In addition to changes in home sales and prices, there’s been a decline in cash sales, Liu said.

“There have been a lot of cash sales going on over the last decade, but that has been coming down gradually,” he said. “This is a big driver for purchase originations.”

Also, he added that with the increase in home prices comes an increase in home equity extraction for homeowners.

“For existing homeowners, higher home prices are a great boon,” he said, adding that the market will likely see more incentives for homeowners to extract home equity over the next few years.

Liu, however, emphasized that these home equity loans won’t be the same as the ones in the past. Lenders are more disciplined on how much borrowers will get.

And on another positive note, Liu added that in terms of risk in the housing market, rising home prices this quarter is a positive for loans since they will perform much better than the previous decade. A rise in home prices helps prevent homeowners from going underwater on their mortgage.

There is still a potential risk in this though. Liu said, “The risk is really for new homebuyers coming into the market since they will have bigger loan balances.”

As a whole, Liu said home prices keep rising due to increased demand from first-time homebuyers and a continued shortage in housing inventory.  

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