Pinpointing the BEST MARKETS.

The total dollar amount of mortgages made to buy homes this year is about to set a fourth consecutive record. That suggests the nation's housing markets are ablaze. But all markets are not equally blessed, and lenders need to heed the research on local housing markets before they set up shop.

AT A TIME WHEN THE NATION'S HOUSING MARKET has been booming and purchase mortgage originations are about to set a fourth consecutive annual record, you might think you could throw a dart at the map and find a prosperous housing market. Actually, the dart approach is not likely to be that successful, even in today's market when many of the nation's housing markets are on fire.

The numbers tell the story more pointedly. There are actually fewer bullseyes on the map than you might think if you are a mortgage lender looking for markets offering the best opportunities. That's because local/regional markets are likely to vary widely (as well as disproportionately) with statistics that reflect national performance because of differences in local market fundamentals.

While purchase originations are forecast to increase 5.6 percent for the nation in 1999, 34 of the 50 states are expected to fall short of that nationwide rate of increase for purchase originations. On the other hand, purchase originations are expected to outpace the nation in 45 of the 80 largest metropolitan statistical areas (MSAs), which range across parts of 33 states.

This apparent dichotomy illustrates the essentially local nature of housing/mortgage market performance. It highlights the need for mortgage lenders to be aware of the varying opportunities across local markets. Yet simply comparing local market performance on the basis of annual percentage changes can be misleading. This is the case because not all markets are being compared against the same benchmark.

Several years ago, the Mortgage Bankers Association of America's (MBA's) Research Division developed the Hot Mortgage Market Index (HMMI) to measure the strength of local/regional mortgage markets and rank them relative to one another. The HMMI is designed to represent residential mortgage market opportunity and is based on projected growth (or levels) in several economic, demographic and housing variables. The variables are payroll employment, personal income, population, number of households, existing home sales, existing home prices, housing permits and housing affordability.

HMMI values are calculated for the current year and the year ahead for the 50 states and the 80 most populated MSAs. The state and MSA markets are then ranked according to these values, respectively. The derived HMMI rankings, which are published in MBA's Regional Mortgage Market Report, can be used by mortgage lenders to determine relative strength among local mortgage markets. They can also be used to monitor changes in a market's strength compared with previous periods. For instance, the numerical rank of a market indicates its opportunity relative to other markets, while changes in market ranks over a period of time alert lenders to new and/or receding opportunities in these markets.

Hot mortgage markets

The top 10 markets in the HMMI rankings are a special group and truly deserve to be labeled "hot" markets. Hot mortgage markets are characterized by strong growth among the various economic, demographic and housing forces cited earlier. Once these markets are identified it allows mortgage lenders to focus their resources in areas that are likely to be most profitable.

Ranked in order, Atlanta, Las Vegas, Orlando, Raleigh, Tampa, Austin, Phoenix, Fort Worth, Dallas and Memphis are shaping up to be the hot mortgage markets of 1999 (see Figures 1 and 2).

Atlanta has been a perennial hot mortgage market since 1993. After ranking as high as fifth leading up to its hosting of the 1996 Summer Olympics, Atlanta suffered a post-Olympics' slowdown in 1997 and almost fell out of the top 10. It has since rallied its way back to lead the nation's mortgage markets in 1999.

Population and household growth have been mainstays in driving Atlanta's strong mortgage markets over the years. However, a resurgence in personal income growth and strong home price gains in recent quarters rocketed Atlanta to the top of the rankings from seventh in 1998. For the year, existing home sales are projected to increase 7.1 percent and existing home prices 8.6 percent, leading to an increase in purchase originations of 16 percent, measured in dollars. Looking ahead, housing affordability has started to decline and is expected to drop Atlanta's rank to second in 2000.

Las Vegas had an off year in 1998, falling to 11th in the HMMI rankings, after ranking among the top two markets in each of the previous five years. An easing in payroll employment and personal income growth were responsible for last year's decline. However, both seem to be back on track and Las Vegas has vaulted back to a familiar standing for 1999.

Las Vegas is still fueled by the fastest population and household growth rates in the nation, which continue to drive a sustainable housing market. Existing home sales are forecast to increase 14.6 percent and existing home prices 3.2 percent this year, contributing to an 18.1 percent increase in purchase originations in 1999. Meanwhile, slower economic growth last year may take its toll on the housing market in 2000, as Las Vegas is expected to slip to fifth on the charts.

A slight breather is in order for Orlando in 1999 after its surge from 29th in 1995 all the way to the top of the rankings last year. Orlando's climb in recent years is attributable to a surge in household growth, which has nearly tripled since 1994. While Orlando's payroll employment growth has been among the best in the nation since 1992, its household growth finally responded after more consistent gains in personal income in recent years. In combination with existing home prices that have risen slowly, personal income growth has helped boost housing affordability to its highest level in years.

For 1999, existing home sales are projected to increase 8.6 percent and existing home prices 5.1 percent, producing a 14.1 percent increase in purchase originations. In 2000, Orlando is expected to regain its standing as the nation's top mortgage market.

Raleigh is a market that almost overheated after existing home prices surged 35 percent between 1993 and 1996. A slowdown in the rise of home prices to levels more in line with the healthy gains of the U.S. market has helped plant Raleigh firmly back among the nation's hot mortgage markets. Indeed, Raleigh ranks higher than it ever has for payroll employment and personal income growth, while population and household growth have maintained their strength. Existing home sales are projected to rise 12.9 percent and existing home prices 5.1 percent in 1999, boosting purchase originations 18.6 percent for the year. Raleigh is expected to move up one notch in the rankings, to third in 2000.

Tampa has been swiftly climbing the ranks since 1995, when it ranked 33rd. Tampa's economic indicators, payroll employment and personal income growth have been driving its move. Payroll employment growth is expected to be second-highest in the nation in 1999 and personal income growth is projected to be among the top 10 in the nation. Consequently, population and household growth are moving up and solidifying the housing market.

Although existing home sales in Tampa are projected to rise just 3.8 percent-least among the hot markets-existing home prices have started to gain momentum and will help elevate purchase originations 8.8 percent for 1999. Although little is expected to change in 2000, Tampa will slip one spot lower in the rankings next year.

Austin's seven-year streak as one of the top five markets may be over, but just barely. Austin has had the highest personal income growth in the nation in each of the last two years, while both population and household growth ranked second in the nation last year. Payroll employment growth has slipped some in recent quarters, constrained by one of the lowest unemployment rates in the nation. Consequently, housing market growth has slowed from its torrid pace of earlier years, although existing home sales continue to set records.

Existing home sales and existing home prices are projected to rise by a more sustainable 4.5 percent and 3.4 percent, respectively, in 1999, increasing purchase originations 8 percent for the year. A stronger housing market performance next year is expected to bounce Austin back up to fourth in the rankings in 2000, from sixth.

Phoenix ranked among the top two markets between 1994 and 1996, but has slipped ever so slightly in recent years as the hot pace set earlier in the decade became unsustainable. Payroll employment growth appears to have bumped up against a historically low unemployment constraint; however, personal income growth, after slipping in 1997, is expected to bounce back to second best in the nation in 1999.

Existing home sales have increased every year since 1992 and are projected to increase 4.1 percent in 1999, while existing home prices are expected to rise 5.3 percent, growing purchase originations 9.5 percent for the year. A more pronounced slowing of the housing market next year, the result of slower employment growth this year, is expected to push Phoenix down to 10th in the 2000 rankings.

Fort Worth is another market that bolted into the top 10 in recent years. Stronger payroll employment and personal income growth are the chief reasons behind Fort Worth's dramatic rise from 26th in 1994. Indeed, payroll employment growth has been accelerating steadily and personal income growth has gone from simply matching U.S. growth to easily outpacing the nation's. As a result, population growth has been on the rise and household growth rates have more than doubled during this time.

This combination of economic and demographic growth culminated in a sizzling housing market in Fort Worth last year. Housing permits increased 31.5 percent and existing home sales rose 26.9 percent. For an encore, existing home sales are projected to increase 9.6 percent in 1999; although existing home price increases will slow to about 2.6 percent, increasing purchase originations 12.3 percent. Forth Worth is expected to drop a notch, to ninth, in the 2000 rankings.

Dallas peaked in 1997 as the nation's top mortgage market, but continues to hold among the top 10 mortgage markets. Some economic slowing is responsible for Dallas' dip, as payroll employment and personal income growth have subsided since the middle of last year, when energy prices collapsed and adversely impacted one of Dallas' major employment sectors. While existing home sales declined initially and have since rebounded, existing home prices have practically flattened, and housing permits have slowed. A 6.9 percent increase in existing home sales and a 1.7 percent rise in existing home prices are projected to increase purchase originations by 8.6 percent in 1999. A rebound in economic performance and existing home prices to previous levels is expected to bump Dallas up to seventh in 2000.

Memphis rounds Out the current list of top 10 markets, moving up from 34th just two years ago. Payroll employment growth has accelerated in recent quarters and is projected to be among the best in the nation in 1999; meanwhile, personal income growth has been similarly strong. Memphis' housing market surged last year, with increases in existing home sales and housing permits of 22.6 percent and 18.1 percent, respectively. Purchase originations increased 33 percent in 1998 and are projected to grow another 12.2 percent in 1999, based on increases in existing home sales and existing home prices of 8.8 percent and 3.1 percent, respectively. After such a rapid advance, Memphis is expected to slip slightly and rank 12th in 2000.

Slightly cooler hot markets

Jacksonville and Denver are two markets on the outskirts of the top 10 worth noting. Jacksonville has been up and down in recent years, moving from 13th in 1996 to 3oth in 1997 to sixth in 1998 and back to 11th currently. Payroll employment growth has been unable to maintain its strong surges, and this pattern of uneven gains has been mirrored in the housing market.

However, Jacksonville is being driven by personal income growth, which has continued to accelerate and was fourth-highest in the nation last year. Housing affordability also continues to rise, and is among the best in the nation. Existing home sales are projected to increase 2.2 percent following a 14.2 percent increase last year, but existing home prices are expected to flatten, holding purchase originations to a 1.3 percent gain in 1999. Jacksonville is expected to rebound some in 2000, and rank eighth in the tally of hot mortgage markets.

Denver was among the hot markets of the early 1990s, but has since fallen to 12th, where it now stands for the third year in a row. While this market's economic and demographic growth land it squarely in the second tier, Denver's housing market continues to be vigorous. Housing permits have set records the past three years and should do so again this year. Meanwhile, existing home sales surpassed their 1993 highs last year, and existing home prices have begun to take off again. Indeed, housing affordability is declining and is adversely impacting Denver's potential. Still, purchase originations are forecast to increase 13.1 percent in 1999, largely on the strength of a 9 percent rise in existing home prices. Denver is expected to remain just outside the top 10, moving up one spot to 11th in 2000.

Markets on the rise

Markets moving up to higher growth tracks as signaled by increased economic, demographic and housing market activity can be classified as markets on the rise. Opportunistic mortgage lenders that discover these markets early, before the competition, can reap significant rewards. Ventura, Sacramento, Miami, Fresno, Oakland and Nassau-Suffolk are examples of such markets (see Figure 3).

Take, for example, Ventura. This southern California mortgage market has roared up from 62nd in 1996 to 19th in 1999, propelled by higher and steadier payroll employment growth and a burgeoning housing market (see Figure 4).

For most of 1992 and 1993, Ventura's payroll employment growth was mired in stagnation. After perking up in 1994, payroll employment growth faltered again over the next two years. Population growth also displayed an initial uptick and home sales increased some, but they also fell back during this period.

But Ventura has come alive again as payroll employment growth has moved to its highest levels of the decade and appears to have steadied at a sustainable pace. Population growth also responded by moving up swiftly, although it has since settled at a somewhat lower level.

The Ventura real estate market got a real pop as existing home sales surged 38 percent in the first quarter of 1999, after starting an upswing way back in the third quarter of 1997. The impact of this increased housing demand has been reflected in stronger home price increases. Although Ventura is expected to pull back to 28th in 2000, the long-term trend is indeed up.

Oakland, across the Bay from San Francisco, has moved up in a more steady progression, from 58th in 1996 to 26th in 1999 (see Figure 5). Oakland emerged from California's much publicized economic problems of the early 1990s a little later than Ventura, and suffered less of a slowing in 1995 and 1996. As a result, population growth has risen at a more sustainable pace and the housing market has been quicker to stabilize. After several spurts in earlier years, existing home sales in Oakland have become less volatile in recent quarters and existing home prices are rising at a steadier rate. Unfortunately, housing affordability is second-lowest in the nation and existing home sales declined in the first quarter. Still, Oakland is poised to continue its rebound and move up six spots, to 20th in 2000.

Miami's rise may be somewhat more in question (see Figure 6). Payroll employment growth has been erratic and population growth has only started to rebound after slipping in recent years. As a consequence, existing home sales have risen in fits and starts; however, existing home prices appear to be breaking out on an uptrend after several years of subpar gains.

Personal income growth in the Miami area is rising strongly, although housing affordability remains low. The fact that payroll employment growth stalled in the first quarter of the year is worrisome and is an early sign that Miami could slide back in 2000.

Fresno and Sacramento are other markets that have rebounded with the fortunes of California. Fresno has surged, from 58th in 1997 to 25th in 1999, and Sacramento has moved up, from 52nd in 1996 to 20th in 1999. Fresno has been elevated by rapid increases in personal income growth; payroll employment growth has picked up more recently and existing home prices are moving back up quickly. Sacramento is being boosted by stronger payroll employment growth, as well as by improving population and household growth. Existing home sales are now increasing steadily and existing home prices are recovering from their trough. Fresno is expected to pull back some in the rankings next year, while Sacramento moves up one spot in 2000.

Nassau-Suffolk's rise from 74th in the rankings in 1997 to 42nd in 1999 is significant. Payroll employment growth is much improved, after having registered its largest increase of the decade last year. Housing permits and existing home sales soared last year as a result, and existing home prices are rising sharply. Indeed, Nassau-Suffolk is well-situated for a further climb in 2000.

Markets slowing/stagnating

Mortgage markets that are declining in rank should be eyed warily by mortgage lenders, as they come with high opportunity costs and are especially susceptible to the hazards that result from over capacity. Thus, it is doubly important for lenders to identify these markets so they can react and manage their resources devoted to these areas appropriately. Houston, Charlotte, Grand Rapids, Seattle, Nashville, Salt Lake City, Omaha, Little Rock and Detroit are markets that have either slowed or warrant watching (see Figure 7).

Houston is an example of a market that bears watching (see Figure 8). After peaking as the second-ranked mortgage market in 1998, Houston suddenly slipped to 13th in 1999. A worldwide drop in oil prices hit this energy industry-led market late last year and caused an abrupt slowing in payroll employment growth and a corresponding drop in personal income growth.

Although existing home sales bounced back in the first quarter, after successive declines in the third and fourth quarters of last year, home sales are expected to decline for the remainder of this year and into 2000. Indeed, existing home prices have already slowed and are likely to see their streak of 13 consecutive quarterly increases halted shortly.

Salt Lake City is a market that flamed out over the past two years but may finally be stabilizing (see Figure 9). Pay- roll employment and personal income growth are increasing at about half their peak rates of the mid-1990s. Population growth has dwindled and existing home sales stalled during the same period that the nation was setting records. Existing home price increases have slowed substantially, and now lag the nation. The good news is that economic growth appears to have stabilized, and signs of a slight uptick are expected to help Salt Lake City continue to right itself in 2000.

Omaha is a market that is still falling after being right on the cusp of the top 10 just a few years ago (see Figure 10). Payroll employment growth has been slowly decelerating over the last four years. Meanwhile, personal income growth slipped last year, to a paltry 1.7 percent from 6.3 percent in the previous year. While the housing market continued to be propped up last year by the surge in population growth from prior years, existing home sales are expected to fall off significantly into next year, and existing home prices are likely to experience little increase from present levels. Moreover, housing affordability has declined almost 25 percent over the last five years, negating any positive stimulus that might help offset slower economic growth.

Charlotte, Grand Rapids and Seattle are markets that have fallen in rank to a lesser extent, while Little Rock and Detroit have taken a deeper plunge.

Seattle's decline is attributable to the financial debacle in the Pacific Rim nearly two years ago and its subsequent effect on the aerospace industry. Indeed, massive layoffs at Seattle's aerospace giant, The Boeing Company, have put a knife into Seattle's housing market. However, Seattle's diverse economy and a rebound in demand from recovering Pacific Rim countries is likely to make this a short-term situation. In fact, a bounce in Seattle's housing market is expected to help turn this market back around in 2000.

Charlotte is experiencing mild slowing in both payroll employment and personal income growth. Although existing home sales and housing permits remain strong, some slowing in the housing market is likely by 2000. Meanwhile, Grand Rapids has simply fallen to a more sustainable growth pace, after a strong economic growth phase in the mid-1990s.

Detroit has suffered from lackluster payroll employment and personal income growth, the result of a declining manufacturing economy. In 1998, Detroit's existing home sales rose by more than 1 percent for the first time in four years, but are projected to experience the second-largest decline among the 8o MSAs in 1999. Minimal population growth provides little optimism for a turnaround.

Finally, Little Rock's housing market likely peaked in 1998. Payroll employment growth is expected to decelerate for a fifth consecutive year and personal income growth has been cut in half in just two years, to well-below average levels. Existing home sales are projected to experience the largest drop in the nation in 2000.

What's ahead for 2000

After four consecutive record years, purchase originations are projected to decline 8.5 percent for the nation in 2000. What can mortgage lenders do to prepare for the 2000 mortgage market? Consider the attractive fundamentals offered by the hottest markets and markets on the rise.

Population growth and household formations are more likely to result in places where employment and incomes are growing the fastest. These are the markets to target because those are the fundamentals that contribute to higher housing and mortgage demand. In contrast, mortgage lenders operating in markets already slowing or stagnating should seriously consider reallocating resources to markets that hold higher prospects of better performance.

Brian Carey is regional economist with the Mortgage Bankers Association of America (MBA) in Washington, D.C. He is responsible for the production of MBA's Regional Mortgage Market Report, National Delinquency Survey and various database products, including the Mortgage Finance Database and Data on Demand.