Rising Rates Have Analysts Rethinking Forecasts
Thirty-year fixed mortgage rates have risen by more than 50 basis points in the past month; the Federal Reserve finally raised the federal funds rate and analysts everywhere are adjusting their forecasts.
Last week, the Mortgage Bankers Association, which accurately forecast that the Federal Reserve would consider as many as three federal fund rate hikes next year, adjusted its mortgage originations forecast, noting that rising interest rates would likely further dampen the refinance originations market. MBA now expects $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,” said MBA Chief Economist Mike Fratantoni.
Meanwhile, First American Financial Corp., Santa Ana, Calif., revised its Potential Home Sales model, noting like the “taper-tantrum” in 2013, rising mortgage rates will cool market potential for home sales and dampen home price appreciation in 2017, although not as severely, said Chief Economist Mark Fleming.
“The market potential for existing home sales continues to grow based on the strength of the broader economy, particularly wage growth, as well as improving access to credit,” Fleming said. “But, the market continues to underperform its potential, primarily a result of persistently tight inventory. The post-election ‘Trump Bump’ in long-term U.S. treasury yields that triggered mortgage rates to rise above 4 percent, as well as the increase in the Federal Funds rate last week, will likely have a modest cooling impact on potential home sales heading into 2017.”
While rising rates reduce affordability for potential first-time homebuyers, the expected moderation of price appreciation will align house price growth more closely with recently increasing income growth to help offset reduced affordability in the year ahead, Fleming said.
The First American report said the market for existing home sales is underperforming its potential by 8.4 percent or an estimated 515,000 of sales. Last month’s revised underperformance gap was -8.6 percent or 526,000 sales.
MBA noted in the month following the election, the 30-year fixed mortgage rate increased by 50 basis points and refinance application volume declined by 28 percent. MBA forecasts $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,” Fratantoni said. “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, MBA said mortgage originations will decrease to $1.57 trillion in 2017 from $1.89 trillion in 2016. For 2018, MBA forecasts purchase originations at $1.18 trillion and refinance originations at $410 billion, totaling $1.59 trillion.
