MBA December Economic and Mortgage Finance Commentary: Rates Increase Post-Election

As expected, the Fed raised rates at its Wednesday meeting by a quarter point. MBA had anticipated that the Fed would move to a more hawkish stance, predicting three hikes for 2017.

The Fed’s statement and Chair Janet Yellen’s remarks at the following press conference met this forecast, as they are now projecting at least three hikes in each of the next three years. Yellen indicated that in addition to a more upbeat forecast regarding the economy, some FOMC members also incorporated into their projections some chance of a tax cut or other stimulative policy from the incoming administration.

In the December forecast, we have adjusted the path of interest rates upwards a bit more quickly in 2017 reflecting the fact that the recent rate increase following the election has been sustained. We expect $479 billion in refinance originations for 2017, a decrease from $901 billion in 2016, as rates have moved higher, forcing a more rapid decrease in an already slow refinance market.

In the month following the election, the 30-year fixed mortgage rate increased 50 basis points and refinance application volume declined 28 percent. We still forecast $1.10 trillion in purchase mortgage originations during 2017, an 11 percent increase from 2016. Strong household formation coupled with further job growth, rising wages and continuing home price appreciation will drive growth in purchase originations in the coming years. Once we start to receive more information on any possible changes to tax, trade, or government spending policies by the Trump administration, we will reassess these estimates.

In total, mortgage originations will decrease to $1.57 trillion in 2017 from $1.89 trillion in 2016. For 2018, MBA is forecasting purchase originations of $1.18 trillion and refinance originations of $410 billion for a total of $1.59 trillion.

Most key economic data released over the past month has indicated strength in the US economy, including key measures of economic health such as gross domestic product and employment. GDP growth in the third quarter was estimated to be 3.2 percent, an upward revision from the 2.9 percent growth rate estimated initially. This was the fastest pace of expansion since 2014.

Consumer spending continued to show positive growth, driven by strong durable goods consumption, while residential fixed investment saw the second straight quarter of negative growth. In terms of the contribution to the growth rate, consumer spending accounted for a large portion of growth as it typically does, adding 1.9 percentage points to the overall 3.2 percent rate. Net exports, which have been a drag to growth over the past years, had a positive contribution to growth for the third straight quarter. Exports grew at a 10.1 percent pace in the third quarter, the strongest quarter since the end of 2013.

We expect that the robust job market will continue to support consumer spending, as will the added equity wealth from the stock market’s gains, and this will continue to drive overall growth. It is also likely that businesses will start to get a clearer picture of the policy landscape in coming months, and may start to be more confident in making capital investment decisions. Economic growth is forecasted to be around 2 percent for 2017, then fall slightly to 1.8 percent in 2018 and 2019. Similar to our originations forecast, we will update the outlook as we get more information on the incoming administration’s policy positions.

Nonfarm payrolls grew by 178,000 jobs in November following a 142,000 job gain in October. The average monthly job gain for 2016 thus far is 180,000 jobs. Private payrolls added 156,000 jobs in November, driven by service industries, with the bulk of the growth from professional and business services and education and health services. Government payrolls increased by 22,000 jobs, the largest monthly number since a 44,000 job increase in August 2016.

The unemployment rate decreased to 4.6 percent from 4.9 percent, hitting the lowest level since August 2007. Labor force participation slipped slightly to 62.7 percent, but the employment to population ratio remained unchanged at 59.7 percent. Of note, the decrease in the labor force was matched by an increase in workers marginally attached to the workplace. The U6 measure of labor underutilization decreased to 9.3 percent from 9.5 percent, reaching the lowest level since April 2008. The decrease in the U6 measure from the prior month was driven by net decrease in its numerator–the decrease in unemployed persons and those working part time for economic reasons was greater than the increase in marginally attached workers.

We expect that job growth will continue in the range of 120,000 to 140,000 jobs per month over the next year, and that the unemployment rate will decline further, leveling out at around 4.5 percent over the next three years.

Inflation firmed in recent months, as the downward pressure from low oil prices continued to reverse and the persistent year over year decline in motor fuel prices nearly evaporated. Headline CPI growth on a year over year basis crept up to 1.6 percent and core inflation, which excludes energy and food prices, remained over 2 percent.

On the housing side, new home sales moderated in recent months, staying in the range of 560,000 to 570,000 units (seasonally annually adjusted), while existing home sales showed a rebound in October, increasing to 5.6 million units, the strongest reading since 2007.We forecast that new home sales will total 644,000 units in 2017, compared to an estimated 569,000 units in 2016, while existing home sales will be 5.72 million in 2017 versus 5.45 million in 2016.

Both single-family and multifamily housing starts surged in October, with single-family starts increasing to 869,000 units from 785,000 units and multifamily starts increasing to 454,000 units from 269,000 units. While these increases were impressive, we note that the pace of permits has not changed significantly, and expect that the starts path will moderate in coming months. Additionally, even with the large increase in October, single-family starts remain well below the levels seen in the 1990s and early 2000s.

In sum, the outlook for the domestic economy and the housing market remains one of modest strength as we enter the New Year.

(Michael Fratantoni is chief economist and senior vice president of research and economics with the Mortgage Bankers Association. He can be reached at Lynn Fisher is vice president of research and economics with MBA; she can be reached at Joel Kan associate vice president of economic forecasting with MBA; he can be reached at Each month MBA Research provides commentary on the current mortgage finance and economic climates. For more information, contact