Despite the confluence of lower home prices and rates, new mortgages are… (Seth Perlman, Associated…)
Despite near-record-low mortgage rates and the cheapest housing prices in eight years, home lending has slipped this year to the lowest level since 1997.
The laggard loan market can be explained in part by the slow economy, numerous foreclosures and the proliferation of "underwater" loans, those that exceed the value of the properties they secure.
But other factors are compounding the problem, including so-called refi burnout — how many times, after all, can one refinance a home? — and a wave of people who have simply decided that homeownership isn't what it was cracked up to be.
Weary of a noisy tenant on the other side of a common wall, Bruce and Deborah Dennis sold their Arcadia duplex in April, banked a $600,000 profit and went looking for a quieter place to spend their 60s.
Bruce's boss, a property manager, urged them to buy another home, saying they'd never again see prices and mortgage rates so low at the same time. The couple searched seriously for two months, even bidding on a home. In the end, they opted to rent a house, leery of tying up capital and taking on the headaches of ownership with the housing market so shaky.
"We thought, 'Is buying really what we want to do?' I have no confidence that home prices are going back up any time soon," Bruce Dennis said.
Opt-outs like the Dennises are one reason the mortgage business, which led the way into the Great Recession, is taking so long to come out of it.
Another factor is the slowing of the refinance market. Mortgage costs are near historical lows, with lenders offering 30-year fixed-rate loans at about 4.2% to Californians seeking $400,000 mortgages, online home-loan specialist Lending Tree said Thursday.
But most of the lucky homeowners who still have equity and solid finances have already refinanced once or more and have long since locked in annual rates of less than 5%.
In 2003, as the housing boom took hold and 30-year fixed mortgage rates fell below 6%, refinancings propelled home lending to four times the current volume. And as the rate tumbled toward 5% and then smashed that barrier in 2009 for the first time since 1956, there was twice as much mortgage lending as now.
"There is a burnout phenomenon," said Mortgage Bankers Assn. economist Michael Fratantoni. In addition, many would-be refinancers have been stopped by the declines in home prices, now back at 2003 levels, which has left them owing far more than their homes are worth.
"Borrowers who couldn't qualify for 4.5% mortgages last year for the most part still can't qualify this year," Fratantoni said.
And getting the purchase market up and running again would require "significant job growth," he said, something that has failed to materialize in the sluggish recovery that is threatening to fall back into recession.
The result of all this: Despite the confluence of lower home prices and rates, new mortgages are down by a third compared with 2010. Lenders will write about $1 trillion in home loans this year, the smallest total since 1997, according to the Mortgage Bankers Assn., which projects that home lending will fall even lower in 2012.
Some say the combination of falling home prices, tight credit in the aftermath of the financial crisis and the flood of foreclosure sales has undermined the traditional view of homeownership as the engine of financial success.
"The previous assumptions that housing is a good investment, or that home prices can only go up, or that all Americans should be able to buy a home, are being seriously challenged," Morgan Stanley housing analysts wrote last month in a study titled "A Rentership Society."
In the middle of the last decade, when the term "ownership society" was coined, the homeownership rate was nearly 70%, the report noted. If delinquent borrowers were excluded, it said, the current rate of 66.4% today would instead be 59.7%.
For those willing to take out mortgages despite all the grim news, the prospects are improving slightly. Lenders have eased certain terms for the first time since the mortgage meltdown took hold, and some on the front lines say banks are abandoning the scrutiny bordering on suspicion with which they had come to regard potential borrowers.
"All those granular issues we were beating people up about over the last three years seem to be going away," Laguna Niguel mortgage broker Jeff Lazerson said. "The hassles over old credit inquiries. Having to explain every entry on a bank statement."
Spokesmen for Wells Fargo & Co. and Bank of America Corp., the largest mortgage companies, said they recently eased standards slightly for loans backed by the Federal Housing Administration, which are attractive to first-time buyers because they require relatively small down payments.
However, among younger buyers, "there's not much feeling that they need to buy right away," Fratantoni said. "I expect that may change over the next couple of years, but certainly for the first-time buyer there's less near-term demand."
Older people can be ownership-averse as well, like the Dennises, who intend to work five more years before they retire.
"To buy another house, we were going to have to come up with a chunk of change for a down payment," Bruce Dennis said. "Then there were property taxes, and of course maintenance — that gets expensive in a hurry.
"The glories of homeownership we no longer have to face."