Not only did home sales drop to their lowest level in nearly 30 years, but first time home-buyers represented just 24% of home sales last year. That is the lowest % ever recorded.

That, combined with growth in the amount of mortgage loan payments that are falling behind, is driving some banks away from the relative safety of home loans and into other, more volatile, loans.

Home Sales Drop to Lowest Level in 29 Years

The Federal Reserve Open Market Committee voted unanimously on Wednesday to hold the Fed Funds target steady at between 4¼ and 4½% in the hopes inflation will subside in the next seven weeks. The next meeting (March 19th) includes projections so we will have a better understanding of what the members are thinking.

As we all know, the only thing guaranteed in life, aside from  death and taxes, is change. We have seen quite a bit of change this year already. Whether it helps or hinders inflation has yet to be seen.

According to the National Association of Realtors® (NAR), in spite of an upturn in the 4th quarter, sales of exiting homes in 2024 fell to their lowest level since 1995 (29 years ago). There are a lot of factors that go into that drop: higher interest rates (the 30 year fixed rate has been hovering around 7%); higher taxes and insurance; and perhaps most important, housing prices that reached record highs last year.

First-time homebuyers, in particular, are being priced out of the market. According to the NAR’s Profile of Home Buyers and Sellers (Nov. 2024), first-time home buyers represented just 24% of home sales last year. That is the lowest % ever recorded.

We need to get them back in the game, and we need to make sure they have the means to pay their mortgage loans and other expenses.

According to the Mortgage Bankers Association, 3.92% of mortgage debt was in arrears to some degree at September 30, 2024. That’s not sending alarm bells off (yet), but it is 30 basis points higher than a year earlier. Bauer is taking note.

You will find 52 banks on page 5 that Bauer is watching closely for cracks in residential real estate loan quality (and perhaps types). Each has a Bauer Star-Rating of 3½-Stars or less, a loan portfolio comprised of at least 30% residential real estate loans, and at least 1.25% of those residential real estate loans are in some form of delinquency status.

It is interesting to see how the different banks address the issue. Some are cutting way back on residential real estate lending:

3-Star Bank of England, AR (13303) is one we have reported on before (JRN 41:06). Operating under a supervisory enforcement action since 2022, Bank of England has spent the last two years divesting its residential real estate loans. They were down 45.6% in the 12 months ended 9/30/2024 and nearly 75% from the third quarter 2021.

2-Star GN Bank, Chicago, IL (29399) is also operating under an enforcement action and is also decreasing its single family loan portfolio (12.6%) in the year. It would be unfair to compare the two, though, as GN has just $66 million in total assets while Bank of England has over $400 million.

3-Star Eastern Savings Bank, FSB, Hunt Valley, MD (32360) decreased its single family loans by 15% during the 12 months ended 9/30/24. It is not operating under type of supervisory order and, unlike the previous two, its assets, including loans, are growing.

We have reported on Eastern SB’s loan quality issues in the past (JRN 41:36) but this is a business choice the bank has made. Eastern SB specializes in loans that other banks may not want to offer. And, to its credit, Eastern SB has a huge capital cushion to protect it from any of those loans that may go sour. With a leverage CR of 25.38% and a Bauer’s Adjusted CR of 21.92%, we’re not worried.

Another, 2-Star Tioga-Franklin Savings Bank, Philadelphia, PA (33802), had its roots as a building and loan. Home lending was its sole purpose. Today, we see it moving away from the relative safety of those home loans in favor of more volatile commercial real estate. The move does not appear to be having the desired results as its loan quality is suffering on both fronts.

Reducing residential home loans is one way to address the problem of rising delinquent mortgages, but it’s not the only way. Other banks are trying different solutions to address the issue.

2-Star First National Bank of Williamson, WV (6805),  for example, is deeply rooted in the coalfield communities of West Virginia and Kentucky. It has no intention of abandoning them now. However, FNB of Williamson has seen its nonperforming home loans skyrocket over the first nine months of 2024.

This is not the first time that FNB of Williamson has encountered tough times; it has always been able to ride them out. Established in 1903, it faced difficult hurdles throughout the 1970s and early ‘80s. This is the first time since Bauer has been rating it, that it has been relegated to the Troubled and Problematic Bank Report.

While FNB of Williamson’s strategy is to ‘ride it out’, 3½-Star Kahoka State Bank, Kahoka, MO (19774) decided to find itself a buyer. On October 5, 2024, Kahoka State Bank became part of 4-Star Exchange Bank of Northeast Missouri (8274) and voila, problem solved.

Finally, 1-Star Columbia S&LA, Milwaukee, WI (28480) has been committed to providing the dream of home-ownership to the growing minority population of Milwaukee. It has been laser-focused on its goal, at times to the detriment of its own bottom line. It hopes to change that with a new President/CEO, Ernst Jones, who assumed those roles in 2022.