ROBERT SEGAL – ?Lack of inventory?
Although 2000 will be remembered as the last year of a long-lasting, robust economy, there were signs that not everyone benefited by the last vestiges of the upward trend.
The total value of loans in 2000 decreased 21 percent to $30.5 billion from the 1999 figure of $38.7 million, according to data from Warren Information Services, a sister company of Banker & Tradesman.
The number of mortgages also declined 22.8 percent to 231,351 in 2000 from 299,485 in 1999.
Average values, however, increased 2.2 percent to $131,957 in 2000 from $129,137 in 1999. The data reflect all mortgages between $25,000 and $500,000.
Most of the decrease was reflected in the residential mortgage numbers, said bankers. That is due, in part, to the substantial increase in housing prices.
“Certainly prices were, for the first six months of 2000, almost like the Nasdaq stock market. There was a period in June where I almost had the sense they were going up 5 percent a week,” said Elliott G. Carr, president of the $867 million-asset Cape Cod Five Cents Savings Bank in Harwichport.
“You’d hear of people who put their house on the market, fairly well-priced, and instantly there’d be three bids and an auction above the offering price. So you had the hottest market in many, many years, including the late ’80s,” he said.
Although “the bloom might have gone off of it about the same time it went off the stock market,” Carr said, it hasn’t started to really fall on Cape Cod yet because there’s no excess of homes to glut the market. In fact, just the opposite has happened.
“No one here makes enough money in their daytime job to pay the prices they’ve been paying for houses,” he said. “So it’s investment-related. How that will all play out is hard to tell. Another reason it hasn’t dropped yet, ironically, is because people are taking money out of the stock market and have been trying to decide, ‘OK, where do we go with it?’ You see more houses being bought for cash. But clearly, if distress in the stock market gets accompanied by economic distress, I’d expect some corrections in the upper end of the real estate market at some point in time.”
“All the Realtors were telling us there was a real lack of inventory,” said Robert B. Segal, portfolio manager with J. William Mantz Investment Advisors in Gloucester.
“It seemed the only place you could find to buy was new construction that was really expensive,” he said. Add to that the fact that in some towns, there was such a frenzy to find homes for sale that word-of-mouth was enough to garner an offer on a home before it was widely advertised. Those were two of the factors that resulted in fewer numbers of sales but an increase in the average value.
“I think the lack of inventory hurt home sales and there was a softer economy [in 2000],” he said.
Even the biggest lender in the commonwealth, Fleet Mortgage, experienced a decline in the number of loans.
“That would be a reflection of real estate values having resulted in larger loan sizes as well. We have seen an increase in our average loan size by about 8 1/2 percent. Related to that is the fact that Fannie Mae also raised their conforming loan limits, which now stand at $275,000 before one goes into the jumbo market,” said Stephen Doran, Fleet Mortgage regional vice president for New England. Fleet, along with most others in the market, experienced a decrease in refinancings last year due to high interest rates, Doran said.
“Meaning last year, three of every four loans we did were purchase transactions. It wasn’t a strong refinance market. This year, it might be 50-50. So there are more people refinancing out of ARMs [adjustable rate mortgages] or consolidating debt because rates are lower this year than they were last year,” he said.
Cyclical Nature
Despite the gloom-and-doom predictions at the beginning of 2001, Doran sees the lower 2000 numbers as being cyclical in nature.
“We have already funded in the first two and a half months this year what took us four months to finance last year,” said Doran of the number of mortgages. “We can’t control the market, but we can control our piece of the market by being a responsible and effective lender. But the actual number of loans, the volume, is way up compared to last year – almost twice [as much],” said Doran.
Segal also thinks refinancings will make a real comeback in this year’s market.
“Interest rates keep dropping. The 10-year treasury right now is yielding 485 [when Segal was interviewed last Thursday]. A month ago, it was as high as about 515. Mortgages usually track the 10-year treasury,” he said.
Although the nature of the business is cyclical, don’t necessarily look for a repeat of the ’80s, said Carr.
“If you went back to the ’80s, you certainly had a boom that was not exactly the same as this one. There were differences, but [there are] a lot of similarities to this one in terms of home prices. Then you had a collapse-there’s no question about that. The big question is, will there be a collapse?” said Carr. While some say there’s no way there can be another collapse like in the ’80s, others aren’t as sure, said Carr. For certain, there aren’t the numbers of 100-home developments or the number of condo developments. “You had a lot of speculators in the housing market last time You had people buying condos in the late ’80s like dot-com stocks,” he said. Some say the market can’t experience another like in the ’80s. “I’m not sure I totally agree with them, but they’re not totally wrong either,” said Carr.
When the economy softens slightly and rates drop, do institutions change their strategies to reflect that? “When rates really drop, that’s a time for mortgage lenders to do a lot of business. The smaller mortgage companies and mortgage brokers really thrive when rates are down like this. They gear up to do a lot of refinances. Banks are traditionally hesitant to put 30-year mortgages on their books, especially at low levels like this,” said Segal.
Doran said Fleet maintains the same strategy throughout the stages of a cycle, that being improving the application and processing ease and speed through technology. “We become better at what we do so we can handle the flow and the increased volume without being disruptive to the customer. Our staffing levels go with the cycles as well,” said Doran.
Carr said his bank concentrates on the quality of its loans, rather than changing strategies to reflect cycles.
“We take what we can get,” he said. “We’re somewhat indifferent to whether it’s refi’s or sales in originations. We’re happy to maintain market share either way. So if there’s anything you do when you see the market turning, [it] is to get a little more conservative loan-to-value ratios or financing speculative home construction.”
