Strong home sales, near-historic low interest rates, a burst of refinancing,
and continued home price growth are moving Freddie Mac’s economic team to
predict that mortgage originations will top $2 trillion this year. That will be the highest volume since
2012. The prediction comes in the
current edition of the company’s Economic
and Housing Research Outlook despite what the authors term overall weak
The mortgage markets continue to feel the impact of the United Kingdom’s
Brexit vote. The report says the
continued flight to safety it, along with other global factors, triggered held
the average 10-year Constant Maturity Treasury yield to 1.5 percent in July
although that is higher than the low or even negative yield in much of the
developed world. Those rates are
continuing to keep downward pressure on U.S. rates and with the outlook for a
rapid global recovery muted, Freddie Mac says that pressure is likely to
persist for an extended period.
Mortgage rates have followed the Treasury note descent. The 30-year
fixed-rate mortgage (FRM) averaged only 3.44 percent in July, the lowest monthly
average since January 2013.
Given the global outlook, Freddie’s economists have lowered their interest
rate estimates for the second month in a row. Last month they cut both the 2016
and 2017 estimates by 40 basis points. This month they cut the projection for
2016 by another 10 basis points to an average of 1.8 percent and knocked 30
more basis points off the 2017 projection bringing it to 2.1 percent. They held the 30-year FRM forecast steady at 3.6
percent after downgrading it by 30 basis points last month, but the 2017
projection has been lowered by another 30 basis points on top of the 50 in
July, to 3.7 percent.
Total sales of new and existing home sales in the first six months of the
year hit the fastest pace since the first six months of 2007, 2.9 million on an
unadjusted basis. With continued job
market growth, a slight improvement in wages, and the interest rate picture
cited above, the Outlook projects the
second half of the year will best the comparable period in 2007, reaching the
highest rate since 2006.
The tight inventory remains a concern.
Housing starts have averaged a rate of 1.16 million this year and are
projected to rise to an average of 1.2 million by year’s end, the highest
number since 2007 but well below long-term demand which the economists put at
between 1.5 and 1.7 million units.
Home prices keep rising, averaging 6.2 percent in June. The pace of appreciation has moderated
slightly in recent months, but remains well above income growth which is rising
at 2 to 3 percent. Increasing inventory
could further moderate price growth and if interest rates should creep higher
those price gains could decelerate quickly.
But returning to the projected boom in originations, the report estimates the
volume in the second quarter was $535 billion; the highest since the second
quarter of 2013, and declining interest rates should boost them higher this
quarter. The Mortgage Bankers
Association Weekly Mortgage Applications Survey has refinance applications up
over 50 percent from a year ago and strong refinance and purchase mortgage
activity should generate total originations of $595 billion in third quarter of
2016, a level not seen since the fourth quarter of 2012.
Freddie Mac analyzed the refinance potential early this year when rates
dropped back below 4 percent for the 30-year fixed-rate mortgage. At that time, in the February Outlook, it estimated there was about
$655 billion in outstanding conventional 30-year mortgage-backed securities (MBS)
with a coupon greater than 4 percent. Now, with 30-year FRM rates falling below
3.5 percent, even more borrowers have a rate incentive to refinance. Currently,
there is about $1.15 trillion in outstanding 30-year MBS with a coupon greater
than 3.5 percent.
This figure is a rough upper bound on the potential rate refinance volume
from conventional conforming 30-year fixed-rate loans in agency MBS and
realistically not all of them are likely to be refinanced this year despite the
rate reduction potential. Some borrowers
have ignored other opportunities and are through to be “burned out,” others
have paid down loans to the point that refinancing costs outweigh the benefits,
and some are afraid they cannot qualify for a new loan. Still, the company
estimates the interest rate incentivized refinancing potential from these loans
for the rest of next year at $530 billion.
They add that there are other refinancing originations that are outside of
their calculations – some from loans that are not in 30-year agency securities
and others that will be refinanced out of a desire to shorten the mortgage term
or take out cash. The estimate also does
not include many mortgage products including loans guaranteed by FHA, VA or RHS
and loans, such as jumbos, held in portfolio.
Chief Economist Sean Becketti said, “At the current pace, we’re likely
to see the mortgage market top $2 trillion in originations for the first time
since 2012. And unlike in 2012, when the market was driven largely by
refinances, today’s market is more balanced between home refinances and
purchases; nearly 50-50. This is good news for home sales as we’re likely to
see the best year in home sales in a decade. This is a good sign for the
housing market as it continues to be an even brighter spot in the economy.
“However, the housing market still has challenges, which is reflected
in our housing starts forecast. Low levels of inventory across many markets
will continue to put upward pressure on house prices for the foreseeable