There’s good news and bad news on the horizon for housing, according to Mark Zandi, chief economist with Moody’s Analytics.
The good news: The current mortgage rate — about 4.5 percent on the 30-year fixed loan — should be good for the industry, with generally affordable home sales, some increase in construction, some refinancing activity. “It’s not a gangbuster year, but it’s a pretty good year,” Zandi said. If the rates fall closer to 4 percent, even better.
The bad news: Don’t count on that last part happening. Zandi finds a rise to closer to 5 percent — with the associated sticker shock for potential borrowers and decreases in home sales and construction — to be more likely. “My sense is that 2019 will be kind of a tough year for the industry.” he said.
The good news: The economy is strong enough — with significant job creation, low unemployment and accelerating wage growth — that Zandi sees little reason to fear a recession in 2019, assuming assorted complicating factors (the shutdown, the trade war, etc.) are resolved.
The bad news: That’s not going to last, especially with the juice provided by the fiscal stimulus fading away. So a recession likely does loom in the future — just likely not until mid- to late 2020, Zandi figures.
Zandi — a member of the Mortgage Guaranty Insurance Corporation board of directors and a former economic advisor to the late Sen. John McCain during his presidential run — is among 13 top thinkers, thought leaders and business leaders across the field of mortgage finance who shared with Mortgage Media senior advisor Dave Stevens their thoughts as to what 2019 will hold.
Zandi is generally optimistic about the prognosis for housing, even amid a significant economic downturn like the recession he foresees or a rise in mortgage rates: The market has “a very strong floor.” And while there are a lot of ongoing factors to keep an eye on, from the shutdown to the trade war to Brexit, he advises planners to concentrate on the areas within their control.
And one thing he’s using his considerable influence to drive home: Removing Freddie Mac and Fannie Mae from conservatorship without substantial reform would be a big mistake, a set-up to go down the same path that led to the subprime mortgage crisis and the need for conservatorship in the first place.
A summary of Zandi’s thoughts looking to 2019 and beyond:
MORTGAGE RATES, AND VOLATILITY
“Clearly in the near term, for 2019, the outlook for the mortgage industry for housing broadly is critically dependent on mortgage rates, the 30-year fixed loan,” Zandi noted. The current rate, around 4.5 percent, is solid: “If that’s where we are for most of the year, it should be an okay year. Housing will remain generally affordable — at least affordable enough — that home sales should, for 2019, be close to what they were in 2018; house price growths kind of low, mid-single digit. With a little bit of luck, we might get some increase in construction. So, it’s not a gangbuster year, but it’s a pretty good year. We’ll even get some refinancing activity at 4.5 percent.”
Say the rates drop down to around 4 percent? “Then we’ll have a good year, a very good year.” Housing will be more affordable, sparking demand and likely some more refinancing activity. But say they go up to around 5 percent, where they were a few months ago? “That’ll hurt. Refinancing activity will dry up, affordability will be more of an issue, we’ll do more sticker shock for potential customers.” Home sales would be down, house price growth would flatline, housing construction would be anemic.
Zandi’s take? Plan for something closer to the 5 percent. “My sense is that 2019 will be kind of a tough year for the industry,” he said.
Beyond rates, what does Zandi think about how factors ranging from the new leadership at FHFA and the GSEs to the government shutdown will impact housing, as far as housing finance, access to liquidity for mortgage bankers and such?
“There’s a lot of moving parts here all over the planet,” he acknowledged, also mentioning the trade war with China and the UK’s “Brexit” from the European Union. But, he advised in essence, don’t sweat all that stuff overly much.
“There’ll be some pluses, there’ll be some negatives — when you add it all up, it’s basically a wash,” he said. “A prudent planner just says, ‘I’m going to continue to do what I do and do the block and tackling that I need to do. And keep my eye on what I have control over.” Maybe be a little more cautious and conservative, take a little less risk? Sure, he notes: “But in general, I just don’t think you should get caught up in all those moving parts, because as soon as you go down that path, it gets pretty bewildering, and I think that’s probably pretty counterproductive. … I think for most people, you should look through it, focus on what you can control.”
WHEN WILL THE RECESSION HIT?
A recession will inevitably come, Zandi said, but not this year; the economy’s going great guns for now. Next year? That’s another story.
For 2019, “I think recession risks are pretty low,” he said. “Obviously, I’m making a lot of assumptions; I’m assuming that the president’s trade war does not escalate, he’s able to find some face-saving arrangement with the Chinese, and at least doesn’t raise tariffs and we go down a dark path. I’m assuming that, I’m assuming Brexit, which is something that hits end of March, is dealt with reasonably gracefully. I’m assuming the government shutdown is resolved. I’m making a lot of assumptions. But the underlying fundamentals of the economy are strong enough I think that we can navigate through 2019 without a recession.”
He points to the job market, with ovver 300,000 jobs created in December and 2.5 million in 2018. Unemployment is below 4 percent, there’s a record number of open job positions, and wage growth is accelerating. “Those cycles get broken and I do think it will be broken at some point. But I just don’t think that’s going to be in 2019. Now, as we’re getting to 2020 I think recession risks will rise.”
Why then? “As we make our way into 2020, some of the supports to growth are starting to fade away. The most important is the fiscal stimulus. So we’ve got these massive deficit finance tax cuts that juiced things up in 2018 and also in 2019 … and this year we’re also getting massive deficit finance increases in government spending. All that goes away in 2020, unless there’s another piece of legislation that gets through Congress and is signed by the president, which at this point seems highly unlikely. So, we’re left with a void in 2020.” And the cycle will start to move in the other direction, with recession risks most pronounced probably around mid to late 2020, he said.
That doesn’t necessarily translate to a significant housing downturn, though. In fact, Zandi said, “I think housing will navigate through pretty well. Certainly much better than housing has navigated through past economic downturns, financial crisis aside.”
He gave two reasons for that optimistic outlook: First, “a very severe shortage of housing” with not enough housing units (affordable housing, not counting high-end apartments) being put up. ”Vacancy rates across that entire housing stock, they’re at 30-, 35-year loans. At the current level of construction, given underlying demand, demographic demand, household formations, that vacancy rate is going to fall further. So that puts a very strong floor, so to speak, under the housing market.” (In previous business cycles, the market was generally overbuilt going into the recession, he noted — not this time.)
Second, house prices have risen, though not enough to necessarily discourage borrowers — and while some markets are quite overvalued (Florida, California, the West Coast), other markets are arguable undervalued. And even the higher-end valuations “are nothing compared to what we’d seen certainly for part of the financial crisis or even past business cycles.”
“So valuation is not the issue that it has been historically, and that’s another reason to think that in this downturn, or the slowdown that’s coming, that housing is going to navigate through, I think, very well. At least by any historical standard.”
DON’T REPEAT YESTERDAY’S MISTAKES
What shape should reform of the Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac — currently in conservatorship take? Whatever it is, it had better be real reform, and not just recapitalizing them and releasing them from conservatorship, Zandi said — or we risk history repeating itself. Stevens, for instance, defends the need for multiple guarantors as opposed to the FM duopoly, diversifying the risk among multiple entities.
Take a look at the GSEs’ history, Zandi advises: “We had a duopoly; it ultimately went down a very dark path and was a significant part of the financial crisis. You can try to put all the restrictions around the duopoly that you want; at the end of the day, if they are out there in the marketplace and have government support, they are going to have a significant advantage and over time they’re going to break through those constraints. And my sense is that we’re going to go down the same path we went.” Having the two as “privatized institutions that have the government backstop” would be a “huge mistake,” he warned.
Especially when there is the opportunity to craft a better system, now, with the advantages of hindsight, of a decade of insight, he noted.
“All we’re going to do is punt and go back to the way it was and just take our chances? I think that’s just a massive error and we should do the hard work. … We have a much better understanding today about how we should design the future system compared to five years ago, or certainly 10 years ago.
“… I get no one wants to disrupt the status quo, but we don’t really have to do a whole lot.”
Mark M. Zandi is chief economist of Moody’s Analytics, where he directs economic research. Dr. Zandi is on the board of directors of MGIC, the nation’s largest private MI company, and is the lead director of Reinvestment Fund, one of the nation’s largest community development financial institutions. He is a trusted adviser to policymakers and an influential source of economic analysis for businesses, journalists and the public. Dr. Zandi frequently testifies before Congress and conducts regular briefings on the economy for corporate boards, trade associations, and policymakers at all levels.
David H. Stevens, CMB, is former SVP of Single Family at Freddie Mac, former EVP at Wells Fargo Home Mortgage, former President and COO of the Long and Foster Realty Companies, former Assistant Secretary of Housing and FHA Commissioner, former CEO of the Mortgage Bankers Association