Housing Market Eases Low-Rate Pain for Banks

Strong mortgage lending will be a boost for banks struggling with low rates

By Aaron Back

    A home for sale in Florida. Data showed home sales remained strong in July. Photo: Lynne   Sladky/Associated Press


America’s housing market is in good shape, giving the nation’s banks a fresh engine for loan growth.

Bankers aren’t fond of ultralow interest rates, as they make the business of lending less profitable.

But major lenders in the U.S. have been able to grow interest income anyway by pushing more loans out the door.

For the past couple of years, commercial and industrial loans were the prime driver of growth.

Recently this has slowed, due in part to less appetite for funding in the oil and gas sectors. But lending to consumers, particularly through credit cards, has accelerated. Now, strong mortgage growth is adding another driver.

The housing market in the U.S. is robust, thanks to mortgage rates that have fallen to nearly record lows and a strong jobs market. On Tuesday, government data showed new-home sales in July soaring to their best level since 2007.

On Wednesday, data from the National Association of Realtors showed a 3.2% annualized decline in July for the more important category of existing-home sales. But this came after several months of strong gains, and represents only a slight fall from nine-year highs. This year is still on track to be the best for existing-home sales since 2006, estimate economists at IHS.

Furthermore, prices are up, with the median existing-home price rising 5.4% from a year earlier in July. This means mortgage sizes are growing, even without more unit sales.

Banks are also choosing to hold more mortgages on their books, rather than sell them off.

According to Federal Reserve data, total mortgage loans held by U.S. banks rose an annualized 10.5% in July, the fastest pace since 2011. The total proportion of all mortgage debt held by banks is still low compared with before the financial crisis, but it has been steadily rising.

Record-low interest rates should also drive refinancing activity. This is a double-edged sword for banks. It is another source of lending growth, but it also means existing loans are being swapped out for new ones at lower rates. Particularly for banks with big holdings of mortgage-backed securities, this can be a problem.

There was a spike in refinancing activity after rates plunged in the wake of the Brexit referendum in late June, but this has since tapered off. If rates take another leg down, expect another growth spurt in both new mortgages and refinancing.

The third quarter began right after the Brexit vote. For most banks, the subsequent volatility and mortgage-refinancing uptick should be a boost in the quarter. Coupled with improved mortgage lending, they could help banks offset at least some of the drag of super-low interest rates.

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