I was at the annual Mortgage Bankers Association conference this week, and the message was one I’ve been spreading for a few months now: Expect a healthy purchase origination market for the year ahead, even as rising rates cool down the refinance market.
That’s great news for us at Movement since more than 85 percent of our business is purchase.
Economists at Freddie Mac, the MBA and others recently released their projections for 2017, giving us a peek of how we should expect the market to behave in the coming months.
Mortgage originations overall will likely drop from $2 trillion this year to $1.65 trillion in 2017, according to a report from Freddie Mac. Driving most of the decline is a precipitous 41 percent drop in refinance volume likely to hit next year, taking refinance originations from $1 trillion to just under $600 billion.
However, purchase mortgage originations — the bulk of our business — is poised to climb by 11 percent next year, or to $1.1 trillion, according to the Mortgage Bankers Association.
“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,” says Michael Fratatoni, the MBA’s chief economist.
Refinancing may take a back seat
So why the reversal in the refinance market? The 10-year Treasury yield is rising, and mortgage rates tend to follow.
The United Kingdom’s dramatic decision to leave the European Union this summer rippled across global financial markets, depressing U.S. interest rates to their lowest levels in nearly 30 years, and the yield on the 10-Year to a record low of 1.37 percent. The result: A higher-than-expected number of homebuyers scurrying to refinance as low rates made it more affordable.
Now that we’re a few months removed from the Brexit, and global economics look more stable, economists expect interest rates to stabilize and trickle upward at a moderate pace. Refinance activity has already begun a descent this quarter, and a potential December interest rate hike by the Federal Reserve will likely pump the brakes further on this summer’s refi surge.
Freddie Mac sums it up well: “Much refinance activity is rate sensitive…so any slight upward movement in rates will likely cool mortgage refinance activity.”
Rates continued a steady climb this week with the 10-Year yield moving past 1.85 percent, a five-month high (See chart below). I would not be surprised to see those yields work their way up towards 2 percent by year end.
Economic recovery aids mortgage purchases
Interest rates aside, researchers still expect consumers to buy and renovate their homes at an increasing pace next year. Home purchase and home improvement mortgage activity is expected to grow, albeit at a slower rate than the downward turn in refinancing.
Such movement coincides with the nation’s modest economic growth. Although that growth hasn’t been as robust as many would hope, economists still expect healthy employment next year. Plus, most believe the economic recovery will support sustained wage growth.
Since wage growth helps eliminate one of the most common barriers to homebuying — affordability — Freddie Mac’s forecast for next year calls for a gradual increase in the number of new housing starts. That creates an opportunity to tap into a segment of would-be homebuyers who have held off on taking out a mortgage for fear of financial uncertainty.