Mortgage risk is rising even as the growth of home price appreciation continues at a different pace at the lower and higher end of the market. According to the American Enterprise Institute's (AEI's) Center on Housing Market and Finance.
The center which released its monthly housing market indicators (HMI) for November on Monday found that mortgage risk had jumped in November with all purchase loan indices either setting or matching all-time highs. On the other hand, it found that house price appreciation remained "strongly bifurcated" with prices at the entry level appreciating at 5.3 percent on an annual basis, while prices at the higher tiers appreciated only 1.5 percent.
Home Prices Splitting the Market
Reiterating what the last report said, Edward Pinto, Co-director of AEI's Center on Housing Markets and Finance said that the HMI's preliminary January 2019 HPA index confirmed that entry-level home price appreciation was accelerating with the "rate of HPA for repeat buyers continues to slow, further evidence of a bifurcated market."
Additionally, Pinto said that the implications of leverage during a long-lasting seller's market were that higher home prices were concentrated at the lower end of the market as well as lower-income neighborhoods where "leverage has been increasing the most."
“After a short period of slower growth at the end of 2018, house prices, especially at the lower end of the housing market, are picking up steam again,” said Tobias Peter, Senior Research Analyst at AEI’s Center on Housing Markets and Finance. “This is something we have been predicting as mortgage rates have fallen back below 4.5 percent, inventories have remained tight, and access to credit, especially for entry-level buyers, has been plentiful.”
Rising Risks: A Cause for Worry?
According to the latest HMI data, the trend of increasing mortgage risks was led by FHA loans with the purchase National Mortgage Risk Index (NMRI) for these loans rising 1.7 percentage points and refinance index going up by 1.8 percentage points. The composite purchase NMRI was up 0.5 percentage points from the same period last year.
Looking at the government-sponsored enterprises (GSEs), the report said that Fannie Mae's risk index continued to outpace Freddie Mac. However, the report pointed out that the risk pick-up had not "translated into any meaningful market share gains for Fannie."
One of the factors that led to rising mortgage risks was the share shift from banks to nonbanks, especially since nonbanks have a greater risk tolerance. The report revealed that "The nonbank’s agency purchase market share set a series’ high in November 2018, while the large bank market share fell to a series’ low."
However, the report noted that purchase volume for November 2018 was down 5.1 percent compared to a year ago. The drop in volume, the report indicated, could be due to greater access to credit allowing first-time buyers to offset higher mortgage rates and higher house prices "while repeat buyers with less access to credit are electing to drop out of the market in larger numbers."