Introduction

When Yield Spread is Slight, Volume is Key

When Yield Spread is Slight, Volume is Key

When Yield Spread is Slight

How do banks make money with a slim interest margin? By increasing loan volume. And after a precipitous drop in residential real estate lending during the housing crisis and Great Recession, we are pleased to report, it is making a healthy come-back. Comments received by the Federal Reserve from businesses across the nation indicate that the growth may be starting to slow,  at least in many regions of the country.

For example, respondents from the Boston Region reported a positive outlook while admitting they are somewhat constrained by low inventories. All areas except New Hampshire and Vermont reported moderate decreases in closed sales of single-family homes.
In New York, commercial real estate has held steady but residential real estate markets have strengthened. Low inventories in upstate NY have pushed prices to new highs. Low inventories and rising demand are starting to have the same effect on the suburbs around the city.
In Cleveland, the average sales price rose almost 5% from January through July, causing a softening in the market.
Richmond, though in the midst of a seasonal summer slowdown,  seems to be experiencing a boom in first-time home buyers. Inventories are low and prices are on the rise. Homes are snatched off the market rather quickly.
In Atlanta, respondents expect home sales to hold steady or increase slightly in the coming months. Home prices have risen a bit as inventory is down with the same number of people looking to buy.
The Chicago area report modest increases in real estate and construction activity. Although, contacts in this region noted that a dearth of single-family starter homes is hindering growth. (The Chicago region has the lowest net interest margin of the six Federal Reserve Regions.)
The Minneapolis region saw modest but widespread growth in most of its larger cities, the Minneapolis-St. Paul area being the exception.
Bargain hunters abound in the Dallas Region. Sales of low and moderately priced homes are strong while those at the higher end have softened.
Just like last year at the time, the San Francisco region was the only region to actually report robust growth in residential construction and sales,  especially in urban areas. (The San Francisco region also boasts the highest net interest margin.)
That leaves the Philadelphia, St Louis and Kansas City regions, which each reported little change in residential loan demand in recent months.
The banks listed on page 7 have had the largest percent growth in 1-4 family residential lending during the 12 months ending June 30, 2017. That’s good news for them; banks that specialize in mortgage lending report the lowest net interest margin as a group at just 2.49%.
Credit card lenders are always the highest. This quarter the interest margin for credit card lenders was 10.86%. That’s a mighty big difference.

Yield Spread and Residential RE Loans