It's Happening Again

(But maybe it's different this time!)

The US Fixed Housing Affordability Index bottoming out in July 2016 augured the Global Financial Crisis. People had to borrow copiously to afford homes, and mortgage debt ballooned. We now know it was all (a) house(s) of cards!

Ominously, we're seeing this again: the fixed housing affordability index has plummeted -49% from its January 2021 high down to 95.5, meaning that the median income is currently not enough for a median-priced home.

(According to the National Association of Realtors, a value of 100 means that a family earning the median income has exactly enough to qualify for a mortgage on a median-priced home.)

When the index fell below 100 in June 1990, a recession immediately followed, and we all know what happened in 2008.

But, maybe it is different this time. Or at least the tune is different, and it may have different effects on renters vs. owners.

Mortgage originations (new paper) fell by 50% from the high of $1.36 TN in Q4 2021 to Q2 2022 and are now lower still. Compare that with the $1 TN + of US Mortgage Originations in each of the seven quarters between Q2 2020 and Q4 2021.

Mortgage originations first topped $1 TN back in 2003 as mortgage rates fell, but plunged as rates rose again. A similar pattern played out starting in 2020, but mortgage rates have increased much more voluminously this time around. But, this downshift has already happened.

More importantly, what else has already happened are the refis--simply put, outstanding mortgage debt now carries lower coupons after historically low rates allowed millions of borrowers to lock in low for longer. That wasn't the case leading up to 2008.

The most impactful salve and difference from 2008 is what's happening to non owner-occupied. After being starved for new multifamily in many metros for years, we are arguably headed towards a glut.

While this may not be good for new multifamily returns, it is going to further soften the blow of a real estate downturn for residents compared to what happened 15 years ago. Let's see what happens.