The New World of Mortgage Tenure

People are hanging onto mortgages and homes longer and longer, and that’s a change that has mixed implications for real estate lenders.

According to Freddie Mac, the typical loan refinanced in the second quarter of 2017 was outstanding 7.6 years. That’s less than the 7.8 years for the first quarter of 2017 – but then the first quarter holds the record for tenure going back to 1994. And in either case, it’s certainly a change from the first quarter of 2001, when homeowners typically refinanced to replace a loan that had been outstanding just 1.6 years.

A certain complacency has begun to emerge in the real estate sector. ATTOM Data Solutions reports “that homeowners who sold in the second quarter had owned an average of 8.05 years, up from 7.85 years in the previous quarter and up from 7.59 years in Q2 2016 to the longest average homeownership tenure as far back as data is available, Q1 2000.”

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The National Association of Realtors (NAR) issued a parallel report: In 2016, the typical seller “was in the home for 10 years before selling – a year longer than 2015 and matching the all-time high in 2014.”

The fact that mortgages and properties are being held so long gives lenders more time to recoup up-front costs: a good thing. Longer tenures mean borrowers can expense up-front costs over a longer period, thus reducing annual costs. Also a good thing. At the same time, longer ownership terms mean homes come to market less frequently, thus reducing opportunities to originate purchase mortgages while holding down the inventory of properties for sale.

The reason owners are holding onto homes and loans for longer terms seems fairly clear: Annual interest levels last topped 5% in 2009. In 2016, mortgage rates reached the lowest annual rate on record, according to Freddie Mac – just 3.65% for the year. Mortgage rates have been wonderful, so what’s the incentive to refinance? Why move with financing locked-in at low rates? And why move if you already have a good mortgage, with the Fed talking about the need for higher bank rates and – indirectly – perhaps steeper mortgage rates as well?

The big question now is whether we’re seeing a long-term trend that will be with us for years. Mortgage rates have been around 4% for so long that predictions of marginally higher rates invoke fears of a marketplace slowdown, as if people don’t realize that the typical rate for the past 40 years or so was above 8.5%.

This shift in perceptions is grounded in a certain reality. People are cautious because income growth news is mixed.

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“Median household income in the United States in 2016 was $59,039, an increase in real terms of 3.2 percent from the 2015 median income of $57,230,” the U.S. Census Bureau reports. “This is the second consecutive annual increase in median household income.”

Not mentioned was that the 2016 figure was just $384 higher in real terms than household income in 1999. Not only that, “inequality remains high,” explains The Washington Post, “with the top fifth of earners taking home more than half of all overall income, a record. And yawning racial disparities remain, with the median African American household earning only $39,490, compared with more than $65,000 for whites and over $81,000 for Asians.”

“We’re enjoying wonderfully low unemployment levels,” says Rick Sharga, executive vice president at Ten-X.com, an online real estate marketplace. “But those levels may be slightly misleading, since labor force participation rates are near their historic lows and the percentage of workers who are employed part-time is at a record high level. The answer to the question of why homeownership rates are falling may be as simple as the fact that wage growth simply hasn’t kept pace with home price appreciation.”

What’s really needed to move the housing sector – and mortgage originations with it – is a greater certainty that the economy has firmed and that good times lie ahead for a wide portion of the public, not just the successful fifth. Recovering after the mortgage meltdown has now taken a decade. That’s a long time, and the country is ready to adopt that great New Orleans motto, laissez les bon temps rouler.

So sure, let the good times roll. Please.

Peter Miller is a contributing writer for Ten-X and Auction.com, as well as a nationally syndicated newspaper columnist. He is the author of the 2016 edition of The Common-Sense Mortgage.

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