Did the Housing Recovery Just Receive a Downgrade?

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Only a few years removed from the housing bubble, the real estate market has been one of the strongest areas of the U.S. economy. Historically low interest rates and inventory levels provided a catalyst for the rebound, but more signs are indicating that the current pace is unsustainable.

Two of the nation’s most well-known banks recently issued a warning signal to the housing industry. Wells Fargo (NYSE:WFC), the largest home lender in the country, announced record full-year and fourth quarter profits. However, revenue declined as the mortgage market slowed. Non-interest income dropped $1.4 billion in the fourth quarter, primarily due to lower mortgage banking revenue. In fact, residential mortgage originations totaled just $50 billion in the fourth-quarter, the lowest amount since 2008 and down sharply from $80 billion and $112 billion in the previous two quarters.

“Reflecting the lower origination volume, we had lower incentive compensation expenses related to mortgage production in the third-quarter,” explained Wells Fargo’s CFO Tim Sloan, during the latest earnings call. “We also had lower personnel expenses reflecting a reduction of 5,300 mortgage full-time employees we announced in the third-quarter and additional reductions of approximately 1,150 full-time employees announced in the fourth-quarter.”

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