Did the Housing Recovery Just Receive a Downgrade?

homes

Only a few years removed from the housing bubble, the real estate market has been one of the strongest areas of the U.S. economy. Historically low interest rates and inventory levels provided a catalyst for the rebound, but more signs are indicating that the current pace is unsustainable.

Two of the nation’s most well-known banks recently issued a warning signal to the housing industry. Wells Fargo (NYSE:WFC), the largest home lender in the country, announced record full-year and fourth quarter profits. However, revenue declined as the mortgage market slowed. Non-interest income dropped $1.4 billion in the fourth quarter, primarily due to lower mortgage banking revenue. In fact, residential mortgage originations totaled just $50 billion in the fourth-quarter, the lowest amount since 2008 and down sharply from $80 billion and $112 billion in the previous two quarters.

“Reflecting the lower origination volume, we had lower incentive compensation expenses related to mortgage production in the third-quarter,” explained Wells Fargo’s CFO Tim Sloan, during the latest earnings call. “We also had lower personnel expenses reflecting a reduction of 5,300 mortgage full-time employees we announced in the third-quarter and additional reductions of approximately 1,150 full-time employees announced in the fourth-quarter.”

JPMorgan Chase (NYSE:JPM), the nation’s second largest home lender, also reported a sharp contraction in mortgage activity. In the fourth-quarter, lower mortgage fees and related income drove non-interest revenue down by 17 percent compared to a year earlier. Meanwhile, JPMorgan said mortgage originations plunged 54 percent year-over-year to $23.3 billion. Purchase originations of $13 billion increased 6 percent from a year earlier, but sank 35 percent from the third quarter.

Shortly after Wells Fargo and JPMorgan reported their financial results, the Mortgage Banker’s Association lowered its forecast for mortgage originations in 2014 by $57 billion to $1.12 trillion. “Despite an economic outlook of steady growth and a recovering job market, mortgage applications have been decreasing — likely due to a combination of rising rates and regulatory implementation,” explained Mike Fratantoni, chief economist for MBA, in a press release.

In addition to higher interest rates, a rapid increase in home prices have weighed on affordability levels. In November, home prices across the nation jumped 11.8 percent from a year earlier, according to the latest report from CoreLogic. Home prices have posted 21 consecutive months of year-over-year price gains, and are expected to finish 2013 up 11.5 percent from 2012.

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