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The era of plentiful refinance volume is over for the foreseeable future, the result of mortgage rates remaining in a very narrow band for the past decade, said Mortgage Bankers Association Chief Economist Mike Fratantoni.
The unexpected drop in mortgage rates since last November was “incredibly positive” for the home purchase business following the rapid rise of last year, but its impact on refinancings was muted, in large part because during in the current decade, rates stayed in a 1 percentage point range between 3.5% and 4.5%, Fratantoni said during a session and separate press briefing during the MBA’s National Secondary Market Conference in New York on Monday.
“It is structurally a different mortgage market than we’ve seen in the past,” Fratantoni said. “That long period of refi activity concentrated the entire market into a narrow band.” There was a much wider spread in rates in the ’70s, ’80s, ’90s and ’00s, providing a greater opportunity for refinancing activity.
As a result, “we’re pretty close to a floor in refis. We will get these little boomlets when rates drop,” but because of the narrow band of rates in the past decade, rates would have to drop significantly for a full refi boom and Fratantoni doesn’t see that happening.
When it comes to purchases, however, “being in a more stable rate environment at the same time we seen some deceleration in home price growth makes it a much more favorable environment for first-time homebuyers,” he said.
Fratantoni’s latest forecast is for $1.682 trillion of volume in 2019, up from $1.675 trillion from his April projections, and 2% above 2018’s $1.64 trillion in originations. His purchase forecast is unchanged, but he increased his refinance to $438 billion from $431 billion.
His forecast is in the middle between Fannie Mae’s $1.66 trillion and Freddie Mac’s $1.73 trillion. All three call for gross domestic product growth of 2.3% this year.
Fratantoni previously raised his purchase forecast, back in April, based on the MBA’s application survey data. But there wasn’t anything in the most recent reports to merit an increase in this month’s purchase forecast, he said during the press briefing.
The forecasts for 2020 of $1.683 trillion and 2021 of $1.74 trillion were unchanged. There will be single-digit growth in purchase volume for next year driven by the job market and household formations, he said.
Meanwhile, the economics of the industry remain challenged on the origination side.
When the data is released, Fratantoni said, it should show the first quarter of 2019 being better for income per origination for independent mortgage bankers, which as a group had an average loss of $200 per loan in the fourth quarter and $118 per loan in the first quarter of 2018.
But “it is still a very challenging environment as costs keep going up and overcapacity in the system,” Fratantoni said.
The inventory shortage, especially at the low end of the market, was a huge concern for another presenter during the economic forecast session.
“My biggest worry about the housing market,” said Laurie Goodman, co-director of the Housing Finance Policy Center at the Urban Institute, “is the lack of supply” both now and in the future.
While there are 1.28 million new units being created annually, homes becoming obsolescent reduces that to just 855,000. But new household formation is running at a 1.2 million annual pace. Furthermore, the average home in this country was constructed in 1977, meaning more houses are aging and becoming obsolete, she said.
The biggest factor holding back new building is land use issues around local zoning regulation restrictions. That is driving the cost of land higher at a faster pace than building the structure. “Building codes are more stringent than they can be, which adds to the cost,” she said.
And this is affecting the lower end of the market. Just 24.5% of supply is at the lowest price tier, but 44.8% is at the highest price, said Goodman from an Urban Institute study of Zillow data.
Another issue affecting supply is the decision by older homeowners to age in place. The problem is that many own homes with four bedrooms, which would be ideal for a young family.
“But they don’t want to move,” which leads to “increased prices for both renting and home buying,” Goodman said.
Still, Fratantoni said at the press follow-up, “we’re better this year than we wear last year in respect to [housing supply]. We have some additional new construction on the market.”
Move-up buyers are benefiting from this and when they do move on, it frees up a property at the lower end, he said.
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