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Just how fast can home mortgage debt Grow? (Cover Report: Industry Trends).

Article Excerpt
Mortgage debt growth is expected to slow modestly in the current decade. This analysis pegs the growth at 7 percent to 8 percent, somewhat off the hot 10 percent pace of more than five decades.

THE PRODUCT OF MORTGAGE COMPANIES IS, oddly enough, mortgage debt. The growth rate of that product is therefore critical to the long-term earnings outlook for mortgage companies.

Figure 1 shows that residential mortgage debt has grown a quite strong 10 percent a year for more than five decades. That is 3.5 percentage points faster than U.S. nominal gross national product (GDP) grew, and materially faster than the growth rate of nearly all major consumer products, as Figure 2 shows.

Can mortgage debt keep up that torrid pace this decade? Not quite, in our view, but not far off.

Fannie Mae has said publicly that it expects mortgage debt growth to average 8 percent to 10 percent this decade, while Freddie Mac came in at 7 percent to 9 percent. We're more conservative at 7 percent to 8 percent. But that should still handily outpace nominal GDP. Mortgage debt growth is currently running at about 10 percent--a pace it has maintained for the past four years. Fannie's forecast is obviously greater than our 7 percent to 8 percent forecast, but we expect mortgage debt growth to slow ahead, and for at least a few years grow at less than our 7 percent to 8 percent trend line figure, as home price appreciation slows.

The 7 percent to 8 percent mortgage debt growth rate arrived at in Figure 2 is based on the fact that mortgage debt growth is driven by five factors: household growth, changes in the homeownership rate, the inflation rate, changes in real home prices and changes in loan-to-value (LTV) ratios. Figure 3 shows our estimates for each of these factors.

Why isn't the level of interest rates on our list of mortgage-debt growth factors? Lower interest rates spur mortgage debt growth in three ways and slow it in one way, and vice versa for rising rates. Lower interest rates increase mortgage debt growth by (1) improving housing affordability and therefore the homeownership rate; (2) lowering the cost of housing and therefore spurring an increase in real home prices; and (3) making mortgage debt cheaper and...