For all the challenges the U.S. economy faced coming into 2003, few dared imagine the kind of unprecedented year that actually unfolded for the American housing industry this year. Just how unprecedented became clear when September's 7.84 million new- and existing-home combined sales rate smashed through August's record-setting pace.
The big story of 2003, however, was not just that mortgage interest rates fell to 40-year lows; but rather, how those rates combined with the extraordinary new capacity of today's mortgage finance system to fund the American dream on a remarkable scale.
To appreciate what made this year's peak performance different from housing cycles of the past, and why the next few years remain so promising for the housing industry, it's worth revisiting the 1991-1992 recession and the housing recovery that followed. Two developments that had gained traction in the early 1980s -- the business of securitizing mortgages and the technology to manage them -- were about to become powerful new forces in the housing market.
Until then, commercial banks, thrift institutions, and other depository institutions dominated the market, controlling nearly two-thirds or more of residential mortgages. The irony of that set up: Whenever the economy slackened, so did the supply of depositories' credit, taking the wind out of housing's -- and the economy's -- sails when it was needed most.
That began to change, though, when a fledgling market for mortgage-backed securities took hold in the 1980s, creating what would eventually become a vast new pool of liquidity for lenders and a competitive new source of global capital for mortgage borrowers and builders. During that same time, advances in technology also were making it possible to process and manage substantially higher mortgage volumes than was possible just a few years earlier.
As the recovery took root, inflation diminished, and mortgage rates fell in the early 1990s, an interesting thing happened: Mortgage borrowers started trading their old mortgages for new ones and channeling the proceeds into new or improved homes. It was a catalytic event for housing and the mortgage origination business, which took off like a rocket, growing 10-fold since 1991 to what this year should approach $4 trillion in new originations.
That, and an influx of pro-housing policy initiatives, unleashed a wave of innovations. The sub-prime market for borrowers with poor credit histories grew from virtually zero a decade ago into an $800 billion market. Mortgage fees and transaction costs, meanwhile, fell from an average of 200 basis points a decade ago to 30 basis points today. The ease in financing a home not only boosted homeownership rates to record levels in 2003, topping 68 percent, but helped housing roll right through the 2001 recession and into new statistical territory this year.
The point is, even as mortgage rates edge upward, these market innovations aren't about to disappear. Rather, they will likely play a continued role fueling the nation's ability to buy and finance homes.
Yes, there are clouds of concern: Freddie Mac and Fannie Mae, which helped unleash the mortgage industry, are now being threatened with new regulatory leashes. Land restrictions and rising state and local fees continue to challenge builders, putting tremendous upward pressure on new-home prices.
The Federal Reserve Board, looking at inflation targets that are actually above current levels, has reason to let the economy pick up speed before it taps the fiscal brakes. Mortgage rates, as a result, likely will remain at relative lows for much of this decade.
Immigration and new household demand are projected to exceed new housing supply well into the next decade. Housing inventories are at all-time lows. And today's better-managed builders are mastering just-in-time home building.
Add it all up, and 2003 may prove not to be so much an extraordinary year but one in a series of highly productive years in America's home building history.