CNBC’s Becky Quick and Bank of America Chairman and CEO Brian Moynihan spoke earlier this week at CNBC’s Net/Net event in New York City.
Moynihan admitted that the mortgage origination business is bad, but will it get worse?
He told Quick: “I think housing is at tails. So the prices are up. The rates are rising. None of that's great. But we still did, I don't know, $10.5 billion of mortgage loans this quarter. Last year we probably did 13 [billion]. So it's not a major change.”
“The inventories are, you know, solid and down. But we got to watch it because it'll be a leading indicator of people's belief in their wealth if you see housing prices tip over. But they're still fine.”
Recent data from his bank is much more optimistic.
Bank of America’s latest Homebuyer Insights Report reveals that Millennials are now prioritizing homeownership above other life milestones, including marriage and having children. To be sure, this is at odds with a recent Freddie Mac report that found renters prefer to rent.
The recently launched BofA report finds that 72% of Millennials (born 1978-1995) consider homeownership a top priority, second only to retirement (80%). Homeownership is also considered a status symbol among Millennials, with many equating it with personal (53%) and financial (45%) success.
Why the change of heart? Blame rising rents and the impact it is having on American pocketbooks.
From the survey:
- 51% of renters believe renting long-term will be just as or less expensive than buying a home, and the other 49% believe it will be more expensive than buying.
- 69% of renters believe their rent will increase every year or every other year, and nearly half (48%) are spending over 30% of their monthly income on rent.
- Half (49%) of renters believe a 20% down payment is required to buy a home.
- 43% of renters think they’ll pay private mortgage insurance if they don’t put 20% down.
- 24% of renters believe they need to have a “perfect” credit score to be considered for a mortgage.
However, Moynihan’s quote earlier is very telling. Millennial renters may be looking to buy and putting a priority on it. But as he puts it: “we got to watch it because it'll be a leading indicator of people's belief in their wealth if you see housing prices tip over.”
People’s belief in their wealth is key to a vital mortgage market. Not just buying as shown above, but also in staying current.
New research from thinktank JPMorgan Chase Institute, titled Falling Behind: Bank Data on the Role of Income and Savings in Mortgage Default, finds that mortgage default closely followed a negative income shock regardless of level of home equity, income, or payment burden (as measured by total debt-to-income ratio at origination).
So, if a household’s wealth takes a hit, so does the mortgage.
“Recovering from mortgage default was associated with recovering from a negative income shock; homeowners who experienced deeper and longer duration drops in income became increasingly delinquent,” the report finds.
“Homeowners with larger financial buffers used their savings to delay mortgage default following a negative income shock. Default rates for homeowners with smaller financial buffers were higher regardless of income level or payment burden,” the report said.
Even if we lend to these renters, the JPM survey finds they are typically not able to cover the mortgage if the household experiences an income shock. Taken altogether, the CEO of BofA is correct to say we need to take things slow, here.
NOTE: Convergys Analytics conducted the online survey on behalf of Bank of America and surveyed a national sample of 2,000 adults age 18+ who currently own a home or plan to in the future.