The past, present, and upcoming months of 2022 for the Property Preservation and the Mortgage Industry
As 2022 continues, property preservation companies are navigating through challenges presented by low foreclosure/REO volumes, navigating regulatory challenges posed by maintaining properties and preparing for an upswing in those volumes as moratoria and homeowners exit forbearance.
The issues facing the property preservation industry are familiar to anyone who has been watching the housing and mortgage markets over the past two years. Insufficient housing inventories were straining the system even before Covid-19 hit. The arrival of the pandemic tightened the screws on multiple fronts, ranging from the decrease in foreclosure volumes (and thus, REO inventories) to ongoing labor shortages and supply-chain issues with much-needed supplies such as lumber and other crucial materials.
Although Covid saw its grip losing in 2021, at least by the numbers, the moratorium law was slowly curbed state by state. As a result, the rate of evictions increased. Homeowners were still struggling to repay loans, and the forbearance plans were being withdrawn, leaving them with no option but to vacate the property. This has marked a small comeback for the property maintenance industry.
However, things have not been smooth for the companies in the default industry still operating. These companies were forced to cut down on their resources due to lack of demand, continued margin compression, as well as the lack of preservation contractors and inspectors who have left the industry for “greener” pastures. Currently, there has been an increase in default volumes, and calling back production resources or hiring people back into the industry has been exceedingly difficult. The companies are now at a place where they are experiencing an increase in their work volumes and are currently positioned needing more staff to process work and finding people and companies to complete the work physically. These companies are now moving to an outsourcing model to recruit vendors and execute all the data processing through outsourced teams.
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State of the Mortgage Markets
Mortgage rates well over 5% have refinancing applications down 83% year-over-year. Another week, another round of unwelcome news for a US housing market under pressure. For the fourth week in a row, mortgage applications, a measure of loan application volume, fell. New applications fell 1.8%, seasonally adjusted, from the previous week, according to the Mortgage Bankers Association (MBA). It is the lowest level of activity the MBA has seen since February 2000, the last year of Bill Clinton’s presidency.
Meanwhile, the Refinance Index decreased 4% week-to-week, and remained 83% lower than it was during the same week a year ago. Increased economic uncertainty and prevalent affordability challenges are dissuading households from entering the market, leading to declining purchase activity that is close to lows last seen at the onset of the pandemic.
The Federal Housing Administration’s share of total applications, subsidized loans made for low and moderate-income borrowers decreased to 12.1% from 12.4% after rising the week before to 12.4% from 11.7%. The share of VA total applications remained unchanged at 10.6%. The average contract interest rate for a 30-year fixed mortgage for loan balances of USD 647,200 or less decreased to 5.74% from 5.82%. The average contract interest rate for 15-year fixed mortgage rates increased to 4.95% from 4.88% week to week.
Pending, Existing Home Sales Fall
Pending home sales fell 8.6% in June nationwide, as homes were 80% more expensive in June 2022 than they were in June 2019, according to the National Association of Realtors. The Southern and Western US saw some of the most robust relocation activity over the past two years. So, if there is some fat to be trimmed, it makes sense that it comes from these regions.
Pending home sales in the West fell 15.9% from the previous month, with a fall of 8.9% in the South. Meanwhile, the Midwest saw the smallest drop-off with a 3.8% fall, followed by the Northeast, which saw a 6.7% decline. “Contract signings to buy a home will keep tumbling down as long as mortgage rates keep climbing, as has happened this year to date,” said NAR Chief Economist Lawrence Yun. “There are indications that mortgage rates may be topping or very close to a cyclical high in July. If so, pending contracts should also begin to stabilize.”
Meanwhile, existing home sales fell for the fifth consecutive month to a seasonally adjusted annual rate of 5.12 million units. Sales were down 5.4% month-to-month, and down 14.2% from the year prior. Total housing inventory registered at 1.26 million units at the end of June, a nearly 10% increase from May and a 2.4% rise from the previous year. “Falling housing affordability continues to take a toll on potential home buyers,” said Yun. “Both mortgage rates and home prices have risen too sharply in a short span of time.” First-time buyers were responsible for 30% of sales in June, up 3% from the previous month but down slightly from 31% a year ago. All-cash sales represented 25% of transactions.
Lack of Housing Affordability
Rising home prices aren’t helping matters, as the median existing-home price rose to a record of USD 416,000 in June, according to the National Association of Realtors. The national median home price rose 13.4% year-over-year, and rose from the revised May price of USD 408,400. A combination of higher prices and higher mortgage rates have clearly shifted the dynamics in the housing market,” Yun said, according to the Wall Street Journal. “People who want to buy are simply priced out given the affordability challenges.”.
Looking Ahead
Supply chain challenges, regulatory hurdles, and other bottlenecks should ease in 2022. The labor and material shortages should subside, but they won’t go away entirely. Today’s rate of home price appreciation is likely unsustainable.
Higher interest rates, which most economists foresee for 2022, will result in other challenges. The state and municipal regulatory nuances will remain an uphill battle.
Another area of risk and concern is insurance rates. The National Flood Insurance Program is going to be a model that’s more reflective of actual risks. So, the premiums will likely increase substantially – especially in places like parts of Florida. The revised flood zone maps should also be more inclusive.
Proper preparation during low-volume times such as these can make the difference between success and failure when those volumes rebound.
One of the things that the industry needs to focus on is having a healthy vendor network, in terms of the number of contractors and inspectors – making sure that the industry is right-sized with the right people in the right areas to do the work that we are contracted with clients to do. The industry needs to make sure they are ready for the uptick in volume next year.
The Property Preservation industry is in a very “sticky” place. Gary Archambault, AVP – Sales & Key Accounts, IMS Datawise, suggests, “The companies will need to figure out how to best staff their businesses, as well as finding the right complimentary mix of contractors and inspectors. With the assistance of outsourced companies, this challenge can be resolved.”
