Weekly Economic Update

Economic News:

The Great Wealth Transfer is Underway

How will this affect the real estate market?

According to TheStreet.com, the Baby Boomer generation owns about half of the nation’s $140 trillion in wealth. These numbers have escalated significantly over the past decade because of gains in the stock market and the appreciation of real estate. According to market research firm Cerulli and Associates, recipients of the great wealth transfer will inherit $84 trillion in assets by around 2043, with $72.6 trillion going directly to heirs and $11.9 trillion going to charity.

Coming back to the topic of real estate, according to the Census Bureau, 42% of the homes in the nation are owned “free and clear” – or without a mortgage. And almost 80% of these homes are owned by those 55 or older. Thus, when we previously said that the listing inventory shortage is going to be at least partially solved by the Baby Boomers, these stats support our statement. Many Millennials and Gen x’s will inherit a boat load of money, and some will inherit houses directly.

They may choose to live in those houses, or they may sell them and use the cash to purchase another home. If they are already homeowners, they may sell their present home and purchase a larger home, or they may pay the mortgage off on their home. While there are a lot of statistics published recently regarding how expensive it is to purchase a home, there will be a lot of cash out there available to make those purchases. Here is the point. The great wealth transfer is underway right now. It will pick up steam in the coming years. And this phenomenon will affect the real estate market significantly.

Administration Trying to Address the Inventory Issue

Biden administration taking new actions to boost housing affordability and availability.

The administration announced further steps to lower housing costs and boost supply. The administration is taking a “comprehensive federal approach,” White House domestic policy adviser Neera Tanden told reporters, toward improving affordability for both homeowners and renters. The newly announced plan will leverage three separate areas toward achieving this goal: Easing land use and zoning rules, expanding financing and promoting the conversion of commercial to residential space. As office space needs have shifted in the aftermath of the pandemic, the administration is incentivizing efforts to convert commercial properties to residential homes. “Our work will involve identifying areas and methods where federal funding, including climate-focused federal resources, can be used to support these conversions,” Biden economic adviser Daniel Hornung said, pointing to funding from the Inflation Reduction Act’s Greenhouse Gas Reduction Fund as one such funding mechanism. Additionally, he said, “The General Services Administration, which manages much of the federal footprint of buildings, will launch an effort to identify and market surplus federal properties that represent the best opportunities for commercial to residential conversions.” To address restrictive land use and zoning policies – including those that prohibit multifamily housing development, among other issues, the administration is looking to incentivize municipalities to lift some of those restrictions by “incorporating land use and zoning into the grant criteria for the historic Reconnecting Communities and Neighborhoods program and also into the Economic Development Administration’s grant programs,” said Hornung. Also, the Department of Housing and Urban Development (HUD) is announcing a new program, the Pathways to Removing Obstacles to Housing program, which will provide communities with $85 million in funding to “identify and remove barriers to affordable housing production and preservation.” (Source: CNN)

What’s Happening in the Jumbo Market

Market volatility has hit jumbos harder than the overall mortgage market.

Over the last year, top jumbo lenders have pulled back on the product due to surging mortgage rates and regulatory risks. Some regional banks working in the space collapsed due to a tightening monetary policy and a deposit run. Meanwhile, others have limited jumbo purchases from smaller lenders via the correspondent channel. What explains this market’s decline? And what does the future hold for jumbos? HousingWire spoke to industry experts, lenders, and loan officers to share their insights on the jumbo market. Spoiler alert: the volatile, high-rate mortgage landscape is hitting jumbos harder than the overall mortgage market.

Jumbo volume has nosedived in the traditional high-cost of living coastal markets. More pain is yet to come, primarily for depositories. Originating jumbos became trickier in the wake of the 2020-2021 refi boom. For starters, jumbo borrowers tend to be more affected by surging mortgage rates than the overall market because the loan balances are higher. The shrinking jumbo market also reflects the broader market forces related to this product — banks have historically used jumbo loans as a means to attract high-income clients who have millions in deposits. These big banks attract customers by offering low rates on home loans; then, they try to sell those clients credit cards, insurance and other products and services. Banks have a massive advantage over nonbank rivals: a balance sheet to keep jumbos in their portfolios. They don’t need to sell them immediately to investors to maintain their home loan business. “In fact, for the most part, jumbo loans over the last few years have been either originated by the bigger banks or originated by smaller lenders and sold to the bigger banks,” David Stevens, a former Mortgage Bankers Association‘s president, said. “Jumbo loans can’t be sold to Fannie Mae and Freddie Mac. So, they have to be sold into the private label market, or they have to be held on balance sheets. Independent mortgage bankers don’t have a balance sheet, so they can’t hold loans.” However, banks are facing major headwinds, which trickles down to the jumbo space. Since the Global Financial Crisis in 2008, depositary lenders have been the target of increased regulatory scrutiny. As a result, some banks decided to exit the correspondent channel, which relies on the small lenders’ production, such as community banks and independent mortgage banks, because of potential ‘reputational damage.’ 

The most recent change from regulators affecting banks and, ultimately, jumbo offerings, came in July. Under changes to Basel III rules, the regulators proposed a residential mortgage capital requirement for large depository institutions that far exceeded international standards. “For most of the last 10 or so years, all of the big banks and the regional banks have been competing for jumbo loans and the deposits that went with it,” Kevin Leibowitz, founder at the Brooklyn, New York-based brokerage Grayton Mortgage, said. “The thought was to win the borrower at a below market rate, and the borrowers’ assets will come with the mortgage.” Leibowitz, however, said the unfortunate reality is that those deposits weren’t ‘sticky.’ “The departure of these assets is now evident in the having to sell mortgages that were in a ‘held to maturity’ bucket on the bank’s balance sheet,” Leibowitz said. “Those assets were worth 80-90 cents on the dollar, and this created the mess from Silicon Valley Bank and First Republic. I think the days of big banks having ‘through the market pricing’ on jumbo mortgages is gone. And I don’t see it coming back.” (Source: HousingWire (Part One))

Real Estate News:

Homeowners Getting Younger

US Census Analysis: From 2016 to 2022, homeownership rates rose most for those under 44.

Prior to the pandemic, Yue and Chris Parsons were, like many Millennials, reluctant renters moving from one apartment to another, wondering when they would be able to buy a home of their own. But the pandemic turned out to be an opportunity — not just for the Parsonses, who are 34 and 36 years old, respectively, but for lots of other young people. From 2016 to 2022, homeownership rates rose most for those under 44, according to recent analysis from the US Census, and much of that came during the pandemic period. The Parsonses, who live in New York City, saw their prospects of buying a home improve during the pandemic as several factors came together: people left the city; the demand to buy a home dropped, cutting their competition; sellers were very motivated to get rid of apartments they could no longer afford; and mortgage rates dropped to historic lows.

The homeownership rate grew overall during the pandemic, but it was fueled by younger people like the Parsonses buying a home, according to the Census Bureau. Younger households are typically more likely to rent than own their home. But between 2016 to 2022, homeownership rates went up among adults under age 55, but stayed the same among those over 55. By 2022, the US homeownership rate was 65.8%, up from 64.6% in 2019. That rebound was driven largely by buyers who were aged 44 and younger, according to the Census Bureau’s Current Population Survey/Housing Vacancy Survey, released in July. Homeownership rates dipped as low as 63.4% following the foreclosure crisis that began in 2004 and the Great Recession that began in 2008. (Source: CNN)