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MBA: Hot job market bolsters mortgage outlook

Earlier this week, the Federal Reserve raised short-term interest rates for the first time this year. Michael Fratantoni, chief economist for the Mortgage Bankers Association, discussed the potential impact of rising rates and why he remains optimistic about the mortgage market and broader economy.

What is your impression of the economy right now? Strong? Very strong? Overheating?

fratantonipicWell, I described the job market as red hot. Initial claims for unemployment insurance are near a 50-year low. The unemployment rate is at a record low in 17 states right now. We expect the national unemployment rate is going to get well below 4 percent this year, and the February job report was incredibly strong: more than 300,000 jobs created. I fully expect wage growth is going to accelerate this year. We already see that in some sectors. Construction wages are rising much faster than overall wages, given the shortage of skilled trades and employees available to work. Growth, in terms of GDP [gross domestic product], is not that much faster. I expect it to be roughly 2.5 percent for the year, but I would really point people to the strength in the job market as a very positive source for the housing market. 

Do you still believe the Federal Reserve will raise interest rates four times this year?

We still think they will do four this year. If you look at their own forecast, it seems almost evenly split between voters [on the Federal Open Market Committee] who would do three versus four. Given what we expect is going to be the path of the job market this year and that we are seeing import prices rise and costs of various inputs rise, I expect they will react to increasing inflation through the year. So, we are still comfortable with four hikes this year, three next year. By that point, [the Fed] will probably take a pause in 2020.

Will there be a significant boost in growth from the tax cut?

We added about a quarter point to our GDP forecast in both 2018 and 2019. Yes, it is positive, but we don’t believe it will lead to 4 percent growth. We don’t see how we get there from here, but we do think it is going to be a positive addition to what we would have had otherwise. 

At the end of this year, where do you think the 30-year fixed rate will be?

Just a little below 5 percent. We have 4.9 percent in the fourth quarter of 2018. Last week in our survey, we had 4.6 percent [for the 30-year fixed rate]. So, it is increasing, but we don’t think long-term rates will increase as quickly as short-term rates.

Would that be huge detriment to the mortgage and housing market?

We don’t think so. We are forecasting that total [mortgage] volume will be down about 5 percent in 2018 relative to 2017. That is largely due to about a 30 percent drop in refinance. We expect that purchase volume is going to increase by about 5.5 percent relative to last year. That comes from growth in home sales, 2 percent to 3 percent growth in home sales, and then further growth in home prices. Just yesterday, the most recent data from the FHFA [Federal Housing Finance Agency] came out, and home prices were up about 7 percent year over year. The shortage of [housing] supply in the country, along with strong demand coming from that strong job market, just means that we expect housing markets to be quite strong for the next couple of years.

About the home-inventory shortages, does that concern you in terms of sales and the amount of purchase loans that are made?

I definitely view it as a constraint. So, it is going to be a bit of a headwind, but it is not going to keep the pace of the home sales from growing. You have a number of current owners who have seen substantial appreciation of their properties, and are now in a place where they could move up, given the equity they have to put into a new purchase. We are also seeing builders pick up the pace of construction. It is still sluggish growth, not enough to meet the demand. We still expect the home prices to move up in excess of income growth.

For mortgage originators, the short-term outlook for refinancing is pretty grim. How long might a down cycle in refinancing last?

Our forecast has refis essentially flat for the next three years at about $400 billion per year. A lot of the thinking behind that is that most of the volume is going to be cash-out refinance. Again, a lot of current owners have a substantial amount of equity built up from the past few years and might want to tap into that. The next real refi boom would probably be coincident with the next recession. That is what would drive rates down. We don’t see much chance at all of a recession over the next two years. By the time you get to 2020 or beyond, the risk increases. So much of the stimulus from the tax and budget agreement are really concentrated in the next two years. We might see a fall in growth by the time we get to 2020. We don’t want to be in a place where we are cheering for the next recession, but if you are looking for when refi volume will really pick up again, it will be coincident with a broader downturn in the economy.

So, are we back to what is a more normal mortgage market?

It is difficult to look back over the past 30 years and define what is normal. We are back to something closer to the early part of the 2000s or the mid-90s, where you had purchase-dominated markets. This is just what it feels like, where refi retreats to being primarily cash out. You get a lot more seasonality in the business because the purchase market is so concentrated in the spring and the summer. It is a very different feel for lenders.


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