MBA, GSE Economists See Some Consensus

NEW YORK–Is it possible for three economists to agree on anything? Chief economists for the Mortgage Bankers Association, Fannie Mae and Freddie Mac gave it a try.

“There’s not a lot to disagree about in the general macro-economic outlook,” said Freddie Mac Chief Economist Sean Becketti here at the MBA National Secondary Market Conference & Expo.

One of the most important economic indicators–gross domestic product–appears to be balanced looking ahead. All three economists see a slight dip in GDP this year before rising and settling.

“We’re now in the third-longest economic expansion in history,” said Fannie Mae Chief Economist Doug Duncan. “However, there’s a 30 percent chance we could fall into a recession in the next six to 12 months. Auto sales have peaked; and we’re seeing an uptick in auto loan delinquencies and credit card delinquencies.”

Becketti and MBA Chief Economist Mike Fratantoni put the odds of a recession at 20 percent. “An economy usually doesn’t just run out of gas,” Becketti said. “Recessions are often event-driven.”

Fratantoni noted the job market continues to improve, with many businesses having trouble filling open spots, resulting in wage growth. “We see the unemployment rate dropping further,” he said.

Becketti agreed. “We’re finally seeing wage growth accelerating a bit. We’ve been waiting a long time for that. Those are signs of a strong economy.”

“We’ve been discussing whether or not there are a lot of people sitting on the sidelines,” Duncan said. “We suspect there are a lot of people still locked out of the workplace.”

Job growth appears to be more concentrated in urban core areas during the current expansion, Duncan noted, a change from suburban concentrations. “That’s a difficult place to build housing, because of the cost of land,” he said.

“There has been a long-term polarization of jobs,” Becketti said. “We’ve seen a decrease in skilled manufacturing jobs and an increase in higher-end jobs. This is affecting how jobs are created in central business districts. Its suggests some challenges for cities going forward in their ability to provide housing near where they work.”

MBA forecasts two more interest rate hikes by the Federal Open Market Committee this year, in June and September. Becketti and Duncan said a third hike could take place in December. “Last year they said they would have four increases and only did one,” Duncan noted.

The FOMC has also hinted that it will begin winding down its portfolio of mortgage bonds, which could also have an impact on rates, Fratantoni said. “The market is going to be watching very closely [this week] and in June as to how it intends to resolve this,” he said.

“The Fed is very divided as to what to do about this,” Becketti said. “It involves not only how much to sell, but which bonds to sell. I think the Fed will start with some modest selling that doesn’t disrupt the markets or even generate a lot of interest. But it’s going to be a tricky business for them.”

“The indicators point to higher rates,” Fratantoni said. The MBA forecast calls for rates to reach 4.5 percent by the end of this year.

Home prices are going up, too, the panel noted. “It’s all supply-side right now,” Duncan said. “It’s nearly impossible to build homes in the urban cores. We should be seeing 1.5-1.6 million housing starts, but we’re only seeing about 1.25 million, so we’re about 350,000 off of where we should be to see something normal.”

“There’s can in the housing market and tightness in the construction market,” Becketti said.

As a result, Duncan said, homeowners are sinking more money into remodeling projects. “The boomers have enough equity in their homes–$6 trillion-so they have the desire to age in place and the means to do so,” he said.

“This has resulted in a lot of people getting cash-out refis,” Becketti said.

And what about Millennials? A recent Fannie Mae paper suggests that the 18-34 generation are moving into homeownership at roughly the same rate as previous generations. The difference, he said, is that the Millennial generation is larger than previous generations.

“Millennials are now buying homes,” Duncan said. “They done what they’ve said-the graduated from college; they paid down some of their student loan debt; they’ve gotten married, albeit later than usual; and now they’re starting to buy homes.”

Housing affordability remains a key issue in many areas of the country; Fratantoni told an anecdote of a 1,100 square-foot home in San Jose, Calif., that recently sold for $1.1 million.

“There are a lot of service workers who work in the San Francisco Bay Area who simply cannot afford to live where they work,” Becketti said. “This causes problems with affordability, transportation and quality of schools…the only people who live close to where they work are those who have bought at high prices or who built their homes 50 years ago.” Becketti added San Francisco could face huge problems if another tech collapse took place.

“The whole discussion of a housing bubble has been coming up again,” Duncan said. “You don’t have the same factors this time around, such as poor underwriting. But it’s something to pay attention to.”

So, could a downturn be in the offing? “We’ve had such a good run that you wonder what will happen,” Becketti said. “Underwriting has been very good, but we’re going to see how these loans, which are now three to five years old, are going to season.

Fratantoni noted loan production costs continue to increase. “It’s a real tough lending environment,” he said. “Now that the bulk of the regulatory and compliance costs have gone through, the challenge will be how to cut costs and improve efficiencies.”

All three economists see a drop in volume for 2017 as refinances continue to wane. Looking ahead, they see loan originations in the $1.5 trillion range, with single-digit growth in the purchase market and a nearly 40 percent drop in refinances.

“Despite increases in rates, we still see a strong purchase market,” Becketti said. “The purchase market has been hampered by supply.”

“As the Millennials move into the market, builders are moving to accommodate them,” Duncan said.