The 21st century in housing finance has brought us in twelve years a boom, a bubble, a panic, a bust, and the shriveling of house prices and private mortgage credit. What's coming next?
As we slog to the future, U.S. housing finance remains and will continue to be a truly big market, although outstanding first mortgages have fallen by $1.1 trillion or 11% from their 2009 peak—from $10.1 trillion to about $9 trillion. National Mortgage News called this "the incredibly dropping U.S. housing debt," in line with what typically follows a bubble: namely, a "shrivel." This still leaves residential mortgages the largest private credit market in the world—well, sort of private. Government interventions helped inflate the bubble, but the Great Shrivel brought more government intervention than ever.
About the dropping size of the market, one industry manager remarked, "It's not something we get hung up on. In time it will start rising again." He's right. But outstanding mortgage debt won't grow again at its 1999-2007 rates for a long time. As a fully mature sector, mortgage debt will resume growth at something like the average growth in nominal GDP—5% or so. At the moment, that sounds very good.
Housing finance will remain a market intertwined with government and politics. It will remain a market burdened and made more expensive and less effective by cumbersome and procyclical regulation. Such regulation is now impeding and will continue to impede the recovery of the sector and the U.S. economy as a whole.
Many people, especially those being paid by Fannie Mae and Freddie Mac, used to call the GSE-centric American housing finance market "the envy of the world." They don't say that any more, and won't for some time. That is good, because confidence in how good you are induces mistakes, just as in the celebrated slogan of Hyman Minsky, "Stability breeds instability." Likewise, instability breeds caution-- for a while.
The future U.S. mortgage finance market will not be so leveraged to mortgage credit risk again anytime soon. Lending will be more careful, we will have a healthy skepticism of the precision of computer models of credit risk, and we will not have another nationwide housing bubble again for another 35 years or so. This estimate reflects the fact that people who were 30 years old in 2007, with searing memories of the panic and Shrivel, will then be 70. Group memories will have faded, and they will be near to or in retirement. Their warnings about what happened in 2007-09 will seem like vague stories of long ago, hardly relevant to those with modern skills and advanced risk management capability!
As the 21st century bubble inflated, people, including financial and housing finance professionals, thought that nominal house prices could not go down on a national average basis. The nearly universal belief that it could not happen, is one of the reasons that it did happen.
Now that national average house prices have fallen 34% in nominal terms and 41% in inflation-adjusted terms, the bubble-enabling belief has evaporated. So we are likely to go back the normalcy of only having local or regional housing booms and busts, tied to cycles of other things, such as energy, technology, or vacation development.
The future housing finance markets will not have Fannie and Freddie in their old form, that is, with their arrogance, their political clout, and especially Fannie's hardball political tactics. Of course Fannie and Freddie have become wards of the government, but in spite of their massive insolvency, have survived.