Shrinking Mortgage Market Could Cost California Economy $2.3 Billion a Year

April 5, 2021 Updated: April 5, 2021

Commentary

Mortgage originations tied to refinancing activity in the U.S. are expected to plummet 76 percent from 2020 to 2022, according to a recent projection from the Mortgage Bankers Association (MBA).

This might be particularly bad for California, which has a relatively high proportion of its workforce working as loan officers.

Refinance-related mortgage originations are projected to fall from $2.4 trillion in 2020 to $1.52 trillion this year, the MBA’s analysis says. The figure will plunge a further 62 percent from 2021 to next year, when the MBA projects refi-related mortgage originations to be just $573 billion.

This might be dire news for loan officers in California, whose job losses might have repercussions across the broader California economy.

Softening the blow in what is forecast to be a rapidly declining refinance sector, loan originations tied to home purchases are expected to increase 21 percent from 2020 to 2022. Loan activity related to home purchases is expected to increase 16 percent, from $1.43 trillion in 2020 to $1.67 trillion this year.  It is expected to increase another four percent to $1.74 trillion in 2022.

The MBA’s expected change in overage mortgage activity—combining the 76 percent decrease in refi activity with the 21 percent increase in mortgages related to home purchases—the overall mortgage market is forecast to shrink from $3.83 trillion in 2020 to $2.13 trillion in 2022, a 44 percent decline.

California Situation

This matters more broadly in California than elsewhere because a relatively high proportion of Californians work as loan officers, and earn 25 percent more than the average worker.

Furthermore, for every loan officer who loses his or her job, another 3.6 jobs are lost.

According to the analysis conducted for the Epoch Times, the cost to the California economy from the shrinking mortgage market could reach $2.3 billion per year.

According to a 2019 analysis conducted by the Economic Policy Institute, every job loss in the finance sector leads to another 1.5 jobs lost in sectors that support finance jobs. An additional 2.1 jobs are lost in sectors utilized by those finance people.

In California, two out of 1,000 workers are loan officers.

This might not sound high, but it’s the second-highest proportion in the nation, behind only North Carolina, which has two large banking hubs in an otherwise low-population state.

The concern for California is that loan officers’ lost wages and spending can lead to a “negative multiplier effect”—the idea that reduced economic activity in their sector may cause reduced economic activity in other sectors where they spend money and rely on services.

As of May 2019—the period for which the most recent data is currently available—loan officers in California earned 26 percent more than other workers in California. At that time, the “annual mean wage,” or average annual income, across California was about $61,300 per year.  Loan officers, however, were earning $77,300 per year.

There are currently 17.3 million people working in California, and if 2 out of 1,000 are loan officers, it means there are about 34,700 loan officers in the state.

It’s important to note that not all loan officers work within the mortgage sector; many work in banks and other lending institutions.

But given the large number of mortgage companies based in California, it is a reasonable assumption that half of all loan officers are doing mortgage-related work.

That means about 7,600 California loan officers who were working in 2020 could lose their jobs by the end of 2022.

They were earning an average of $77,300 each, accounting for $587 million a year in lost wages throughout the state.

If you factor in the 3.6 jobs lost from each loan officer no longer working or spending their earnings, at an average annual salary of $61,300, an additional $1.68 billion could be lost.

In total, the California economy could suffer a blow of some $2.3 billion per year compared to 2020 as interest rates rise and fewer people refinance their preexisting mortgages.

Hope for the Future

Of course, during the next two years, hopes are high that the economy will reopen more broadly, international students will return for in-person instruction, and amusement parks and sports venues will all lead to a spending boost. This will likely be a stronger “add” to the California economy than any “subtraction” caused by any contraction in loan officers losing their jobs.

However, the lending sector may not be as robust during the next two years as it was throughout the past two years.

Tim Shaler is a professional investor and economist based in Southern California. He is a regular columnist for The Epoch Times, where he exclusively provides some of his original economic analysis.