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Purchase Mortgages Expected to Increase Next Year Despite Higher Interest Rates, Pessimism

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There’s been a lot of negativity regarding the housing market lately, some that I feel reflects the usual seasonal slowdown more than anything else.

Yes, listing prices often fall in autumn because there are typically more homes on the market and fewer prospective buyers chasing them late in the year. That leads to price reductions, and inventory increases in the process.

Sure, we’ve seen these negative indicators rise year-over-year, so it’s probably more than just seasonal, but the negative headlines keep pouring in warning of bubbles, inventory gluts, price reductions, higher mortgage rates, and so on.

I fully understand that home prices have gone up a ton since they bottomed around 2012, but that doesn’t mean they’ll just automatically go down now.

In 2007-2008, home prices tanked because the majority of mortgages were complete garbage. Often stated income, or worse, no doc, with zero down payment, typically refinanced or purchased at the height of the market at 100% LTV.

Today’s housing market is characterized by an enormous amount of untapped home equity because everyone has a 30-year fixed they wouldn’t dare give up.

If anything, real estate is experiencing some growing pains as sellers come to terms with the fact that you can’t expect every property to go under contract overnight regardless of quality or price.

Expect a Strong Housing Market in 2019

  • Despite a lot of negative press lately
  • Some of which might be driven by seasonal factors
  • The 2019 spring home buying season should be another strong one
  • And the higher mortgage rates might make it even more competitive

I still believe 2019 will usher in another strong spring home buying session. And if interest rates continue to rise, or remain elevated, it could make the market even more competitive as buyers race to lock in relatively low interest rates.

Evidence that next year might not be so bad comes from the Mortgage Bankers Association (MBA), which actually anticipates home purchase lending increasing next year.

The group revealed their 2019 and 2020 estimates today at their Annual Convention and Expo in Washington, D.C, and they seemed to buck the negative news cycle we’re currently riding.

For 2019, they expect $1.24 trillion in purchase mortgage originations, up 4.2% from this year, which might seem surprising given the fact that the $1.148 trillion in home purchase mortgages funded in 2017 was the highest total since 2006.

If you recall, 2006 was the most recent market top when homes were flying off the shelves and inventory shortage wasn’t even in the vernacular.

So for 2019 to be the best year in decades is pretty remarkable. In 2020, it gets even better with purchase originations of $1.27 trillion, per the MBA forecast.

The Housing Fundamentals Look Good

  • MBA chief sees low unemployment and improved wage growth
  • Moderating home price increases may level playing field for buyers
  • Mortgage rates may also be flattening out after big increases
  • And wave of Millennials set to enter housing market coupled with limited new home building should keep demand strong

MBA chief economist Mike Fratantoni noted in their release that unemployment is at its lowest level in nearly half a century, which should equate to improved wage growth and home buyer confidence.

If anything, a moderation in home price increases (not outright declines) will allow wage growth to play catchup.

Additionally, there’s an expectation that home purchase origination volume will rise each year from 2019-2021 and beyond thanks to a “wave of millennial buyers beginning to hit the market” and limited new home building.

Then there’s mortgage interest rates, which despite a rough year, might be leveling out at current prices.

While they expect the Fed to increase short-term rates another four times between now and the end of 2019, they’ve got the 30-year fixed pegged at just 5.1% at that time.

It’s currently pretty close to that depending on the mortgage lender in question, so it could mean rates are topping out after some steady increases.

Assuming prospective home buyers come to terms with the fact that 5% isn’t so bad, rates shouldn’t get in the way of progress.

Of course, it’s not all good news. As a result of the higher interest rates on offer, mortgage refinance volume is expected to erode over the next year.

The MBA expects refinance volume to fall by 12.4% in 2019 to $395 billion before reversing course and rising to $410 billion in 2020.

At some point, homeowners are going to want to get their hands on all that sweet, sweet equity, so we could see upward revisions in the future as well.

It’s unclear how they’ll tap it without losing their low fixed-rate first mortgage, but my assumption is they’ll care less about it when they realize they won’t stay in their current home forever. Or that an adjustable-rate mortgage might be priced attractively as well.

History tells us that home equity won’t remain untapped, and with the Fed raising rates, which directly increases rates on HELOCs, going the home equity route isn’t necessarily going to be favorable, nor is a higher-priced fixed home equity loan.

Overall, total mortgage volume is expected to fall from $1.64 trillion this year to $1.63 trillion next year, and then rise to $1.68 trillion in 2020. So let’s all relax.

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