Mortgage Debt to Double During Next Decade

In a report published by the Homeownership Alliance, four principle drivers of mortgage credit demand were reviewed, including: household growth; increases in homeownership; home-value appreciation; and leverage. The study provides industry forecasts for the next 10 years, or 2004-2013.

The Washington D.C.-based coalition consists of more than 15 housing organizations including Fannie Mae, Freddie Mac and the Independent Community Bankers of America.

The authors of the report, America’s Home Forecast: The Next Decade for Housing and Mortgage Finance, include economists from Fannie, Freddie, the ICBA, the National Association of Realtors and the National Association of Home Builders.

The Homeownership Alliance, which says it is “focused on preserving, protecting and promoting expanded homeownership opportunities,” reported that the average LTV for all U.S. mortgages reached 45% by the end of 2003. “America’s homeowners are not over-leveraged, and measures of financial obligations remain within historical ranges.”

Over the past decade, residential mortgage debt, including multifamily, grew at an annualized rate of 8.4%. As of year-end 2003, residential mortgage debt outstanding totaled $7.8 trillion. Over the next decade, it is projected to grow by 8.25% per year and double debt outstanding to $17 trillion, the report said.

Home-value appreciation, which has been the largest single component of mortgage credit demand growth, should continue averaging around 5% percentage per year as it did in the past decade. Faster home price growth, related to land-use controls and other supply constraints, would translate into higher levels of originations and stronger debt growth. If supply constraints continue to tighten, home value appreciation could be above 6%, which in turn would push annual mortgage debt growth in excess of 9%, or $19 trillion by the end of 2013, the authors said.

Assuming house price growth of 5% per year, originations are forecasted to double those of the past decade to a total $27 trillion, or about $3 trillion per year. This volume will finance approximately 125 million homes, of which 60% are projected to be home purchases and 40% are expected to be refinance. “First-time homebuyers will remain a major component of the purchase market, buying about 24 million homes over the next decade,” the authors wrote.

“The secular increase reflects the increasing financial sophistication of America’s families as well as the technology-driven declines in the cost and time to obtain a new mortgage.”

The forecast report said funds to support mortgage originations will primarily come from the sale and securitization of loans in the secondary market.

“There are, however, a number of challenges that deserve prompt attention:” increasingly stringent land-use controls are pushing up house prices and impairing housing affordability in many areas; the potential for increasing strains on the long-term federal budget may threaten the programs that help provide affordable rental housing for low-income households; proposed changes in the regulation of the government-sponsored enterprises could impair their ability to fulfill their secondary mortgage market role; an increasingly diverse population will challenge homebuilders, real estate professionals and the housing finance sector to meet a range of differing expectations and needs of the growing population of foreign-born households; and the “glaring and persistent gap” between the homeownership rate for non-Hispanic white households.

Utilization rates on home equity lines of credit and second mortgages increased 8.13 bps to 49.41% in June 2004 versus December 2003, according to the forecast.