Rising Values Affect Originations

Harvard’s Joint Center For Housing Studies 40-page report on the state of the nation’s housing indicates improvements in the mortgage finance system and a stricter inventory management in the new construction industry are two ways to lessen “boom-bust cycles in the future.”

For now, due to the strong appreciation values and eroding affordability, more borrowers are turning to exotic adjustable rate mortgages in an effort to afford a more expensive home. The report noted that in two year’s time, interest-only loan volume went from almost zero to one-fifth of total mortgage loan volume — comprising 37 percent of all ARMs in 2005.

Many borrowers have been left with the burden of financing higher home prices while others have been cashing in on the benefits of the additional equity.

Home equity cash out hit a record high of $243 billion last year, up two-thirds from the previous year with $73 billion of that equity realized in capital gains that was not reinvested, the report said.

Large equity stakes were reported for a majority of homeowners in 2004. About 60 percent had at least half an equity stake in their home, with only three percent holding less than a five percent stake, the report noted.

“All this cash helped to fuel consumer and home improvement spending,” the report said. “Even owners who did not tap their equity felt more confident about spending because of their rapidly appreciating properties.

“While estimates vary, the housing wealth effects from strong appreciation contributed roughly one-third of the rise in real consumer spending in 2005 and added about half a percentage point to the real growth in the economy,” the report said.

Subprime lending has helped those with damaged credit tap into the recent rise in equity as well. The report noted that subprime loan volume ($625 billion) has tripled since 2001 and represented 20 percent of last year’s originations.

Aside from the current slowdown, the market overall should remain solid, the report surmised. “The housing sector continues to benefit from solid job and household growth, recovering rental markets, and strong home price appreciation.”