Analyzing the American Homebuyer: Will Stagnant Earnings Drive Demand for Non-QM loans?


Perhaps no other aspect of the US economic recovery has been more impressive than the labor market. Seven years after the global financial meltdown, the US economy is near full employment with 14 million jobs added since 2010. Gas prices are cheap, interest rates are low and inflation is tame. So why are so many Americans struggling to make ends meet?

Part of the problem lies in weak wage growth, something that has puzzled Federal Reserve officials for a long time. Average hourly wages are growing just above 2% annually, barely enough to offset inflation but nowhere near levels considered sufficient enough for the labor force to actually benefit from economic growth.

How do we reconcile huge job growth with only a modest pick-up in wages? Researchers are split, but one theory suggests that meager wage gains reflect the quality of jobs (or lack thereof) being created in America. Naturally, lower-skilled occupations pay lower wages and typically have far less earnings upside than high-skilled occupations.

Another explanation seems to be that many more Americans are involved in side-jobs or “informal work” that is “presumably not reported in full to the Internal Revenue Agency,” according to a 2015 report by the Federal Reserve Bank of Boston.[1] Our goal here isn’t to out American workers who may or may not be reporting their taxes, so we’ll leave it at that.

Naturally, the question of earnings leads us to housing affordability and whether the jobs Americans are participating in are enabling them to become homeowners. While the housing recovery is slowly gaining steam, the uptick in home sales over the past five years hasn’t kept pace with the resounding success of the jobs recovery (at least on paper the jobs recovery has been successful, since it’s tough to argue against 5% unemployment). Part of the problem has been how quickly house prices have appreciated, a trend that has left many would-be buyers out of the market. Data also suggest that the recovery has yet to trickle down into poorer neighborhoods, which are still struggling to regain their footing after the financial crisis.

The Wall Street Journal printed a report last year showing that many middle- and upper-income communities have seen their home values nearly return to pre-crisis levels. For lower-income neighborhoods, nothing can be further from the truth. Between 2006 and 2015, the median value of homes in the bottom third of the market plunged 13%.[2]

As it turns out, rock-bottom interest rates have been the main catalyst behind the jobs recovery. This certainly isn’t earthshattering information. But it is startling to think just how reliant our economy has become on cheap credit. Take a look at this neat chart:

US Existing Home Sales Feb 2012 to Mar 2016 | GoRion Blog

Notice that huge dip in existing home sales at the end of 2013 and beginning of 2014? That coincided with a rise in mortgage rates, a sign that borrowing costs are make-or-break for a significant portion of the market. As the chart clearly shows, existing home sales have more or less bounced back in 2015, a period characterized by lower interest rates.

The economic well-being of the American homebuyer matters a great deal when examining the residential real estate market. Rising house costs and stagnant wages could make it more difficult for buyers to meet the Qualified Mortgage guidelines set forth by Dodd-Frank. For borrowers who feel they can’t qualify for a loan because they have a debt-to-income ratio greater than 43%, non-QM lending may be the alternative route. As we’ve mentioned before, there is some movement in this market, but it remains relatively subdued overall.

Whether non-QM lending takes off depends on a number of regulatory hurdles, but the path to clearing those hurdles could hinge on the appetite of banks to make non-QM loans. This will depend in large part on the health of the American homebuyer and whether surging home prices and tepid wage growth could create more demand for non-qualified mortgages. Keep monitoring the housing and employment data to learn more.

[1] Victoria Stilwell (March 31, 2015). “Why Wage Growth Is So Slow Even in a Hiring Boom.” Bloomberg Markets.

[2] Joe Light (June 23, 2015). “Why the U.S. Housing Recovery Is Leaving Poorer Neighborhoods Behind.” The Wall Street Journal.

This article was written exclusively for GoRion.

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This article has been exclusively written for GoRion by...

Sam Bourgi

Sam Bourgi

Sam Bourgi has more than seven years of progressive experience in economic analysis, market research, public policy and the financial markets. He has a broad expertise in the financial markets, including commodities, real estate the foreign exchange. As a published author in both peer reviewed and industry research, Sam has covered topics ranging from mortgage-backed securities to consumer spending and labor. Sam's resume includes more than 40 government and industry publications, thousands of financial articles and hours of educational resources on personal finance and trading.

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