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Mortgage market sticks to script

As the midpoint of 2017 approaches, the mortgage market is unfolding much as forecasted, with home-purchase volume rising and refinancing falling. Mortgage Bankers Association Chief Economist Michael Fratantoni spoke with Scotsman Guide News about expectations for the market through the remainder of the year.

Is there anything about the year that has surprised you so far?

I would say that the purchase volume has not increased at the pace that we originally projected. Given that the job market has been even stronger than we projected, that is a little bit surprising. Squaring that circle, there is lots of evidence that the inventory of homes on the market just remains incredibly tight. So, even though the demand is there, the supply has not yet responded to the extent that we thought it would, and that has been holding back volumes. Originally, we had forecast 11 percent purchase growth in 2017 relative to 2016. Now we are forecasting 9 percent growth, and we are comfortable with that forecast. That is anticipating some supply growth for the rest of the year.

FratantpicHas there been any other issue with home purchases?

For a number of weeks this year, we have seen a record high in terms of the average loan size on the purchase portion of the market. What that says to me is that first-time buyers are not showing up to the extent that we thought they would. And so, you are not getting the smaller loan sizes offsetting the strength we are seeing in the upper and middle end of the market. There are two reasons for that potentially. One, as I have already mentioned, is the real lack of inventory, particularly at the entry level. Second, though, is that rates did jump up. After the election, rates went up almost three quarters of a point. It would not be surprising that you would have some potential first-time buyers being a little nervous about that, and delaying their purchase. Our thinking is that for many people, the decision to buy a home is really driven by their personal circumstances and their overall financial picture. Rates being somewhat higher is not going to be a long-term hurdle, even though it may cause them to be a little hesitant in the first half of this year.  

Would you say that issues with prices and inventories are widespread, or confined to a few areas?

Honestly, it is very consistent across the country. Where we are seeing strength in terms of growth of transactions is in the middle of the market  — call it $200,000 to $600,000. Where we are seeing weakness is at the entry level, maybe below $200,000 and above that $600,000 range relative to last year. Whether you look in the Midwest or on both coasts or in the South, we are really seeing very consistent patterns in our data.

Government-sponsored enterprise (GSE) conventional refinancing for the first quarter of this year was running ahead of the same quarter last year. Is this surprising to you? 

Our data is showing that year-to-date refinancing has dropped about 20 percent relative to last year over the same time period. Sometimes the GSE data lags the primary market a little bit because they are receiving the loans a couple of months after those loans are originated. We are really capturing loans at the application date or at the origination date. So, it is not surprising that the GSE information is lagging just a bit, but I would expect that to tail off fairly quickly as well. What we have seen with mortgage rates at about 4.25 percent in terms of our application index is that the refi index has been in a range of about 1,200 to 1,300 on most weeks. Just by comparison, last year we were 2,000 to 2,200. So, we have seen a very sharp falloff in application activity, and do expect that is going to tail off even further in the second half of this year.

What is your forecast for interest rates?

In terms of 30-year fixed mortgage rates, we are at about 4.25 percent last week. We think we will be between 4.5 percent and 4.75 percent by the end of the year, and rising above 5 percent in 2018. We do expect the Fed to increase rates by 25 basis points in June and probably again in September. We are also anticipating that the Fed is also going to begin to shrink its very large balance sheet beginning in December of this year. That is going to be another factor putting upward pressure on rates. Beyond that, you now have a situation where the federal budget deficit situation is increasing again.Treasury is going to be issuing a lot more debt and that will be yet another factor putting upward pressure on rates. Going against that, we still have substantial geo-political uncertainty. From time to time, that is going to lead to a drop in rates, but we do expect that rates are going to trend upward over the next couple of years, even if you get these moments where they fall again.

So, in other words, the bottom could fall out of refinancing?

Last year we estimated that there was $900 billion in refinance. This year we are estimating a little over $500 billion. And then in ’18 and ’19, we think we will hit a floor of $400 billion for the year.

With home prices rises and lots of people regaining equity, will most of the refinancing activity be cash-outs?

I do. Looking at the Freddie Mac data, we are up to about 40 percent today are cash-outs, and I think that will continue to increase. You have a number of homeowners who have regained a substantial amount of equity, and some may decide to tap into that with a cash-out. Others may go to a HELOC [home equity line of credit] or a closed-end second [mortgage]. We expect some pickup in cash-out refinancing.

Despite the drop in refinancing, will 2017 be relatively strong in terms of origination volume?

In terms of mortgage volume, we see it dropping from about $1.9 trillion last year to about $1.6 trillion this year. We expect it to be in the range of $1.5 trillion to $1.6 trillion over the next couple of years. That is a pretty big drop in volume. On the other hand, the broader economy is doing quite well. The job market is very strong. It looks like it is even picking up some pace in terms of wage growth. That is very positive news for the purchase market over the longer term. We needs some more units. We expect some growing new- and existing-home sales over the next couple of years as more units come online.  


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