Freddie Mac expects $172 billion less in mortgage originations if the current pace of cash sales continues
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Freddie Mac linked a decrease in mortgage originations with the ongoing inventory shortage in the housing market, according to its monthly outlook for August.
The government-sponsored enterprise said the limited housing supply has made the housing market competitive. This has resulted in a significant increase in cash sales above historical norms, thus negatively affected mortgage originations.
"Usually, not many people like to invest a lot of cash into real estate, which is illiquid and has high transaction costs,” said Sean Becketti, chief economist at Freddie Mac. “However, in the current, highly competitive housing market, a cash offer is an effective way to gain an advantage over other bidders. In a cash sale, the seller doesn't have to worry about the buyer's ability to obtain a mortgage or the chances that an appraisal will come in below the agreed sales price. And each cash sale means one less mortgage origination."
Freddie Mac said cash sales made up 18% of all home sales in June. Although this is less than the record high of 35%, the figure is still above the 10% historical average. If cash sales maintain their share at around 20%, mortgage originations would be $172 billion less than what they would be if the cash sale share fell to the historical norm.
Additionally, Freddie Mac said it expects housing starts, home sales, and house prices to improve in the remainder of 2017.
Starts are expected to improve in the second half following lower-than-anticipated activity in the second quarter. However, the total is expected to stay well below the long run average. Home sales are expected to grow 3% from its 2016 rate to reach 6.2 million units this year given expectations that mortgage rates will remain under 4% until year-end. Although the tight inventory is restraining home sales, it is driving house price appreciation, which is forecast to average 6.3% this year.
Related stories:
High prices dampen homebuyer enthusiasm
Home sellers see average price gain reach 10-year high
The government-sponsored enterprise said the limited housing supply has made the housing market competitive. This has resulted in a significant increase in cash sales above historical norms, thus negatively affected mortgage originations.
"Usually, not many people like to invest a lot of cash into real estate, which is illiquid and has high transaction costs,” said Sean Becketti, chief economist at Freddie Mac. “However, in the current, highly competitive housing market, a cash offer is an effective way to gain an advantage over other bidders. In a cash sale, the seller doesn't have to worry about the buyer's ability to obtain a mortgage or the chances that an appraisal will come in below the agreed sales price. And each cash sale means one less mortgage origination."
Freddie Mac said cash sales made up 18% of all home sales in June. Although this is less than the record high of 35%, the figure is still above the 10% historical average. If cash sales maintain their share at around 20%, mortgage originations would be $172 billion less than what they would be if the cash sale share fell to the historical norm.
Additionally, Freddie Mac said it expects housing starts, home sales, and house prices to improve in the remainder of 2017.
Starts are expected to improve in the second half following lower-than-anticipated activity in the second quarter. However, the total is expected to stay well below the long run average. Home sales are expected to grow 3% from its 2016 rate to reach 6.2 million units this year given expectations that mortgage rates will remain under 4% until year-end. Although the tight inventory is restraining home sales, it is driving house price appreciation, which is forecast to average 6.3% this year.
Related stories:
High prices dampen homebuyer enthusiasm
Home sellers see average price gain reach 10-year high
