For the FHA, Pricing Springs Eternal

Following several years of premium increases, the FHA implemented a 50 basis point reduction in its annual mortgage insurance fee in 2015.  The sharp reduction was expected to boost affordability for entry-level and disadvantaged home buyers and to stimulate access for new buyers in this part of the market.  Through May, the impact of the reduced fee has been a strong gain in purchase mortgages compared to the same time period in 2014.

On January 26^th of 2015, the FHA reduced its annual mortgage insurance fee from 1.35% to 0.85%.  NAR Research estimated the reduced fee would lower the payment on a $200,000 mortgage by nearly $1,000 annually and to draw in 90,000 to 140,000 additional homebuyers per year.  That would suggest an increase of 15% to 24% endorsements for purchase mortgages in calender year 2015 relative to 2014.

From January to May of 2015, the FHA endorsed roughly 251,000 purchase mortgages compared to 214,000 over the same period in 2014, an increase of 17.6%.  However, since the pricing change was implement in late January of 2015, the effect would be isolated to the statistics for February through May.  FHA endorsed 21.6% more purchase mortgages between February and May of 2015 compared to the same 4-month period in 2014.  Non-seasonaly adjusted existing home sales rose just 7.6% over this same time period.  Improved consumer confidence and tailwinds from strong emlpoyment growth in 2013 and 2014 likely played a role in the robust growth at the FHA, but endoresements in January prior to the rate reduction were just 3.8% stronger than the prior year, though stronger than the flat reading in existing sales.  This pattern suggests that while economic factors were important for FHA borrowers relative to the market, the pricing change was key to the strong gains this spring.

If growth relative to 2014 remains at 21.6%, the current pace, for June through December the FHA will endorse more than 120,000 additional purchase loans in 2015.  But if it slips to 13.8% over this period, annual growth for the year would register 15.1%, or an increase of 90,000 endorsements.  Mortgage rates are expected to increase in the second half of 2015, which could weigh on sales favoring the latter estimate.

 As depicted in the map above, the strongest responses at the county level to the change in fees were in the Northwest, Arizona, Florida, northern Wisconsin, Michigan, Illinois, and Maryland.  The Midwest was a mixed bag, with endorsements rising sharply in many counties while other counties experienced sharp declines.  Pockets of declining endorsements were also evident in California, Texas, Oklahoma, New Mexico, Southern Wisconsin, Iowa, western New York, and southern Alabama and Georgia.

At the Metro level the strongest gain was in South Bend (IN) followed by Port St. Lucie (FL) and Duluth (MN-WI), while the weakest gains were in San Francisco and San Rafael.

Stouter employment trends and buyer confidence appear to be driving stronger national sales, but the FHA’s new pricing is driving a disproportionate improvement in its market.