Lenders Scramble as Homebuyer Pool Stagnates

To understand why home lenders are suddenly dabbling in loans to the credit-impaired, home equity loans for up to 125% of home value, and even small-business loans, consider this:

The nation's pool of first-time homebuyers-typically households headed by 25- to 34-year-olds-is drying up. In 1996 there were 227,000 fewer than in the year before, as most baby boomers headed into their late 30s and 40s.

The Ozzie-and-Harriet household-husband, wife, and one or more children- has grown scarcer. There were 333,000 fewer such households last year, while those headed by single parents or that were childless grew. The traditional household has been the backbone of trade-up homebuying, with the arrival of children impelling families to buy bigger homes. The trade- ups, in turn, release a supply of starter homes for first-timers.

With economic growth moderating and these long-term demographic changes taking place, it's no wonder mortgage lenders anticipate a lethargic market well into the next decade, said Paul C. Taylor, senior economist at America's Community Bankers, a trade group representing thrifts and small banks.

Indeed, mortgage volume, which surpassed $1 trillion in 1993, won't return to that level until 2011, according to Regional Financial Associates, a West Chester, Pa., economic forecasting firm. And that number will be achieved with help from price inflation.

To be sure, some offsetting factors may operate. More optimistic analysts see the current wave of immigration, savings from low interest rates, and a rush of boomer retirements as sources of stronger mortgage demand.

Mortgage lenders are already augmenting other business lines. Consumer loans will comprise 12% of thrifts' loans by 2000, about double the level in 1993. Home loans will slip to 82%, down from 93%, according to a recent survey by ACB.

Because of their numbers, baby boomers have set the agenda for the U.S. housing market for decades. In the 1970s and 1980s, boomers fueled first- home sales and school construction.

In the 1990s, flush with stock-market wealth and rising incomes, boomers have traded up to bigger, more luxurious homes. Homes worth $500,000 or more accounted for 2.18% of resales in the first quarter, up from 1.48% in 1995, according to the National Association of Realtors.

The problem, says Mr. Taylor, is "nobody's coming after them" to maintain first-time homebuying activity. Smaller, less expensive homes are languishing, he said, and added that trade-up buying could also be in for a slide in a few years.

As boomers get older, they'll be less mobile and change homes less frequently, said Mark Zandi, chief economist at Regional Financial Associates. This will be offset to a small extent, he said, by the increased demand for vacation homes among boomers.

Mr. Zandi is predicting modest growth in the mortgage market for two other reasons.

The refinancing boom this decade helped millions of homeowners lock in rates as low as 7.25%, on average-making them reluctant to sell their homes and get a new mortgage at a higher rate, he said.

Nor will refinancing homebuyers pick up the slack. In the early 1990s, interest rates plunged from the double digits to 6.75%, causing the boom.

But through 2005, Mr. Zandi projected rates will fluctuate in a narrow band-between 7% and 8%-so homeowners won't have a big incentive to refinance.

Slow home price growth-averaging 4% annually through 2005-will also sap demand, he said.

In the 1970s and 1980s, when prices were rising rapidly, homes became investment vehicles. Even young homeowners bought the biggest homes they could afford-and traded up often.

Now, with home prices barely exceeding inflation, the smart money is in the stock market, not trophy homes.

Still, some economists stress a brighter view of the mortgage market. Frank E. Nothaft of Freddie Mac says the refinancing boom of the early 1990s has started helping home resales, as homeowners invest the money they've saved on lower mortgage interest rates in larger homes.

"They are now looking to go for a bigger house with more amenities," Mr. Nothaft said.

David Lereah of the Mortgage Bankers Association said aging baby boomers won't hurt the market right away. For one thing, boomers who retire early are likely to boost demand in states like Florida and Arizona within the next five years, he said.

But other economists said boomers would put off retirement because many haven't saved enough for it. Mr. Zandi said he doesn't expect boomers to retire in big numbers until 2010.

A critical source of growth, all agreed, would be the wave of legal immigrants-averaging 800,000 annually for the next decade-one-third of the 25 million or so new Americans projected for that period.

Though homeownership rates among immigrants are low early on, they eventually rise. But Mr. Zandi argued that federal and state policies could stem immigration and cut into that source of housing growth.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER