Pros are more bullish on house prices
Fannie Mae’s latest survey shows that consumers expect home price appreciation to increase by 2.5% over the next 12 months. This is up 20 basis points, or bps, month-over-month. It was up 50 bps year-over-year, or YoY. The 2% expected home price appreciation last year was met with mid single-digit returns in most indices—including the Federal Housing Finance Agency, or FHFA, Home Price Index or the Case-Shiller Home Price Index.
Unfortunately, Fannie Mae wasn’t conducting these surveys during the “go-go” days of the housing bubble. It would have been very interesting to see what people thought home prices would do. Interestingly, even as prices were falling, consumers were “calling the bottom” and expecting modest home price appreciation.
The 2.5% home price expectation is much lower than the 5%–6% forecast we’re seeing out of the National Association of Realtors and the mid single-digit forecast we’re seeing from most Wall Street professionals. Lingering sentiment from prior market moves is typical. Most people didn’t believe the declines early in the bear market. So, we shouldn’t be surprised that people don’t believe that we’re now in a bull market for homes.
Implications for mortgage originators
Mortgage originators—like Redwood Trust (RWT), PennyMac (PMT), Nationstar (NSM), and Wells Fargo (WFC)—are very sensitive to consumer sentiment about home prices. Originators have been lucky. Interest rates fell. You can trade through the iShares 20+ Year Treasury Bond ETF (TLT).
However, they suffered from an overall lack of confidence in the real estate market. As time goes on, they must pivot away from the refinance business and focus on the purchase business. The purchase business is driven by more than interest rates. Sentiment, demographics, and seasonality all matter. For the origination business, 2014 was a dismal year. Increased confidence means 2015 could be much better.