MBA Forecasts Strong Increase in Purchase Originations, Drop in Refis

BOSTON–The Mortgage Bankers Association’ economic forecast for 2017 predicts purchase origination volume to crack the $1 trillion mark for the first time in 11 years.

The MBA forecast calls for purchase originations to rise to $1.10 trillion in 2017, up by 11 percent from 2016 ($990 million). Purchase originations are forecast to rise to $1.178 trillion in 2018 and $1.245 trillion in 2019.

However, the overall mortgage origination forecast shows decreases over the next three years, as anticipated refinance volumes continue to decline in the wake of expected increases in mortgage interest rates. MBA forecast refinancings to fall by 40 percent in 2017 from 2016, to $529 million from $901 million, and by even more in 2018 ($410 million) and 2019 ($395 million).

With these numbers, the overall origination forecast shows a drop in 2017 ($1.629 trillion, from $1.891 trillion in 2016), falling even more to $1.588 trillion in 2018 before increasing to $1.640 trillion in 2019.

“With the Brexit vote in June, and with the financial market volatility earlier in the year, refinance volume was much higher than anticipated,” said MBA Chief Economist Michael Fratantoni here this morning at the MBA Annual Convention & Expo. “The world is an uncertain place, and there is always a chance that rates could drop again in response to global turmoil, but we expect that refinance volume will most likely be much lower over the next few years as homeowners have repeatedly had the opportunity to lower their rates, and there will be fewer households with an incentive to refinance if rates follow the path we are projecting.”

Strong household formation coupled with further job growth, rising wages and continuing home price appreciation will drive strong growth in purchase originations in the coming years, Fratantoni noted. “This comes in context of a strong job market. We see a lot of positive demographics–household formation is picking up and will continue to do so in coming years,” he said.

Fratantoni said MBA expects the Federal Open Market Committee to raise the federal funds rate in December and as many as three times in 2017 as inflation picks up. “Mortgage rates will go up, but much more slowly,” he said.

The MBA forecast calls for overall economic growth of 1.5-2.0 percent over the next three years–not robust, Fratantoni said, but strong enough to lead to further job and wage growth. “Rate increases through 2017 and 2018 will likely be gradual, as Chair [Janet] Yellen and the Fed have indicated that they are going to be cautious going forward,” he said. “Historically low, and in some cases negative, rates around the world continue to put downward pressure on longer-term U.S. rates, keeping them lower than the domestic growth environment would otherwise warrant. We expect that the 10-Year Treasury rate will stay below 3 percent through the end of 2018 and 30-year mortgage rates will stay below 5 percent over the same period.”

The forecast also calls for monthly job growth to average 125,000 per month in 2017, down from about 180,000 per month in 2016, with the unemployment rate averaging 4.6 percent over the next few years. Fratantoni said stabilization in labor force participation rates will keep the unemployment rate from decreasing much further.

“In this market you only need to add about 100,000 jobs per month to keep the unemployment rate steady, so the economy has really been outperforming as of late as we reach full employment,” Fratantoni said.

Fratantoni added that home prices will continue to increase well in excess of inflation. “There is a housing shortage in this country–we are not building enough homes to support demand,” he said.

MBA Vice President of Research and Economics Lynn Fisher said strong household formation among minorities and younger people should lead to more opportunities for lenders. She noted potential headwinds for household involve housing supply–or lack thereof.

“We saw a huge surge in renting following the financial crisis and were unable to supply enough rental housing,” Fisher said. “Single-family housing development has been much slower than multifamily, and we haven’t been building a lot. We have a shortage of labor, which is driving up labor costs; and a shortage of lots, which is hampering home building. The homebuilding segment is only now starting to pick up, so for now we continue to see a 5 percent increase in home prices year after year.”

MBA Vice President of Industry Analysis Marina Walsh said mortgage industry profitability should continue in 2017. “Profitability has been good this year for the industry, around 73 basis points, which translates to about $1,700 per loan,” she said.
On servicing side, Walsh said, the numbers are looking even better; the most recent MBA National Delinquency Survey showed mortgage delinquency rates at a 10-year low and loans in foreclosure at the lowest level since 2000. “Profitability for the servicing side has been with independents who are holding servicing rights,” she noted. “Independent mortgage banks, on the other hand, are reporting losses because they can’t counterbalance their expenses.”

Other key forecast data:
–Housing starts: 1.268 million in 2017, up from 1.165 million in 2016. For 2018, an increase to 1.363 million units; for 2019: an increase to 1.463 million. Single-family housing starts could top 1 million by 2019.
–Existing home sales: 5.704 million in 2017, up from 5.414 million in 2016. For 2018, an increase to 5.944 million; for 2019, an increase to 6.06 million.
–New home sales: 647,000 in 2017, up from 583,000 in 2016, increasing to 695,000 in 2018 and 725,000 in 2019.
–Federal Housing Finance Agency House Price Index: falling to a 4.9 percent annual rate in 2017 from 5.4 percent in 2016; falling further to 4.1 percent in 2018 and 3.3 percent in 2019.
–Thirty-year mortgage fixed rate: Rising to 4.2 percent in 2017 from 3.6 percent in 2016, increasing to 4.6 percent in 2018 and 5.4 percent in 2019.
–Federal funds rate: rising in 2017 to 1.375 percent from 0.625 percent in 2016 and increasing to 2.375 percent in 2018 and 3.375 percent in 2019.
–Unemployment rate: falling to 4.6 percent in 2017 from 4.9 percent in 2016 and holding steady at 4.6 percent through 2019.