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How Stock Market Growth Impacts Housing and Mortgage Originations

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Investors tend to keep a close eye on their portfolios as well as their home values. The U.S. stock market has been experiencing a long-running bull market with a string of major milestones this past year. In October, the Dow passed the 23,000 mark for the first time, and it had only passed 22,000 two months earlier.

We know that stock market growth is generally good news for investors and consumers, but how does it impact home values? Here is what we are currently seeing in the housing and origination market, how the stock market impacts those figures, and what the future could hold in those areas.

The Current Housing and Origination Market

According to Reuters, U.S. housing starts hit a one-year low in September thanks to the disruption in building activity created by Hurricanes Harvey and Irma. Housing starts remain below the peak levels experienced in 2006 before the housing bubble burst.

Housing starts in September fell 4.7 percent for the month, which was the lowest rate in a year. Building permits also fell 4.5 percent in September to a rate of 1.215 million units, which was below the forecasted rate of 1.250 million units.

The Mortgage Bankers Association Weekly Mortgage Applications Survey for the week ending Oct. 20 reveals that mortgage applications fell 4.6 percent overall from the prior week. Mortgage applications to refinance a home also fell 3 percent for the week. However, the average loan on a purchase application was $317,000, which is the highest level since May.

Much of the dip in mortgage originations was blamed on a bump in mortgage rates. The average interest rate for a 30-year fixed mortgage increased to 4.18 percent from 4.14 percent the prior week for loan-to-value ratios of 80 percent. These rates were at the highest level since July of this year.

How Stock Market Growth Impacts Housing and Originations

One of the primary things that stock market growth measures is investor and consumer confidence. Consumers are more likely to buy big-ticket items such as cars and houses when they are comfortable that their prosperity is going to continue.

Often, share prices in the market are a reflection of either what is happening in the economy or what people expect to happen in the future. If investors fear a recession or tax policy changes that could impact their wallets, they will be discouraged from spending and investing.

There is a cyclical relationship here as well. As consumer confidence remains high, so will housing starts and loan originations. This will also impact financial stocks and other housing-related stocks. As these stocks continue to perform, investors will have a bullish outlook.

On the other hand, waning consumer confidence will keep spending dollars away from big-ticket purchases, depress the housing market and originations, and have a negative impact on future market performance.

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What the Future Holds for Housing and Mortgage Originations

While investor sentiment is currently positive, this is certainly subject to change in the coming months. On Nov. 2, President Trump announced Jerome Powell as his pick for the next head of the Federal Reserve, which gives us some indication of attitudes on future interest rate hikes. The proposed tax changes on the block may also make it more difficult for some consumers to purchase homes in the coming year.

Also of interest are certain housing-related stocks that tend to mirror growth and pullbacks in the housing market. Among these are Lowe's, Whirlpool, Stanley Black & Decker, and PPG Industries. Unfortunately, some of these stocks are down from their recent highs in 2017 despite the fact that the major stock indices keep climbing. Whirlpool stock is down 11.2 percent year to date, and Lowe's stock is up just 13 percent so far this year, with gains of only 1.46 percent in the past month.

As of Oct. 20, the Mortgage Bankers Association (MBA) seasonally adjusted weekly index was down 19 percent from the same week in 2016. The interesting thing is that higher home prices are showing up on mortgage applications, which indicates that there remains a housing shortage in some areas. The MBA is currently predicting a 28 percent reduction in refinance originations in 2018 because there could be additional interest rate hikes on the way.

Selling Mortgages to Minimize Risk in Loan Portfolios

The best way to minimize risk in a loan portfolio is to spot potential issues as early as possible. While the chances of a housing crash similar to the last one are slim, there are signs that we could see a pullback in the coming year. By partnering with a reputable asset management company, a bank or credit union can receive sound advice and the tools necessary to protect bottom line results. Selling non-performing assets and acquiring others can give your organization the opportunity to minimize losses and maximize profits.