70% of homes are purchased with a mortgage here in California in 2021. While cash purchases have increased alongside steep competition in 2021, the vast majority of purchases continue to rely on financing. Thus, the state of the mortgage market is a major influence on the housing market, here in California and nationwide.

The dollar amount for mortgage originations is expected to total $3.8 trillion in 2021, according to the Mortgage Bankers Association (MBA). This includes roughly:

  • $1.6 trillion in purchase mortgages; and
  • $2.3 trillion in refinance mortgages.

Mortgage originations in 2021 are down slightly from 2020, which saw record levels of refinancing.

The MBA forecasts mortgage originations will decline a whopping 33% in 2022, due to rapidly declining interest in refinancing as interest rates rise. In fact, the MBA forecasts interest rates will rise nearly a full percentage point in the coming year.

However, the MBA expects purchase originations to rise in 2022 and 2023 with rising sales volume, driven by increased construction. In 2021, builders have faced delays due to supply chain disruptions and labor shortages, but MBA’s forecast is that these factors will subside in 2022, allowing builders the chance to catch up and meet demand.

While the MBA’s outlook is broadly optimistic for the coming years, some problematic factors identified include:

  • rising inventory, which will cool down home prices — good for homebuyers but difficult for sellers;
  • still-constrained credit availability, which has made it harder for first-time homebuyers to qualify for a mortgage in 2021; and
  • rising servicing costs, which lenders will inevitably pass along to homebuyers and refinancers to increase the cost of borrowing.

Funding the foundation for a healthy housing market

Access to mortgage credit is now 30% lower than immediately before the 2020 recession, according to the MBA.

Low credit availability continues to be a source of struggle for mortgaged homebuyers, especially first-time homebuyers who lack current home equity to put towards their down payment and reduce their loan-to-value (LTV) ratio. As cash purchases have soared in 2021 and inventory has plummeted, buyers seeking to enter homeownership continue to hit roadblocks.

Today’s tightening mortgage standards are yet another symptom of the ailing housing market. True, home values have been swollen by low interest rates and extreme competition in the face of low inventory, but the foundations of the housing market continue to crack under the pressure.

In 2022-2023, watch for the cracks to manifest in reduced home sales volume and prices. Most importantly, until the jobs market fully recovers, homebuyers and renters will continue to miss payments, causing an increase in forced sales, evictions and vacancies.

Just over one million jobs were still missing from California’s economy as of September 2021. Until a full jobs recovery arrives, lenders will remain cautious, and otherwise qualified homebuyers will be held back by reduced access to mortgage credit. At the present start-and-stop pace of recovery, jobs aren’t expected to begin a consistent recovery until around 2024.

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