MBA Expects Higher Rates and Less Originations. Labor Market is Biggest Variable in Housing Forecast

Slowly rising interest ratesrncoupled with relatively stagnant home sales will have repercussions in the mortgagernindustry over the next few quarters according to the Mortgage BankersrnAssociations (MBA) Mortgage Finance Forecast for the Fourth Quarter of 2009.

This is how the MBA opened their December 2009 Mortgage Finance Outlook:

“The most important factor driving recent declines in real estate market activity and increases in delinquencies and foreclosures has been the ongoing job losses and rising unemployment rates stemming from the most severe recession the country has experienced in a generation. The central question in any forecast for the housing and mortgage markets is the outlook for the job market: when will companies begin hiring again?”

“Property values will not recover until the overhang of unsoldrninventory returns to normal levels, reducing the excess supply. Thisrnexcess supply will remain unless and until homebuyers return to thernmarket in force. Even though affordability remains near record levels,rnthere has not been any strong indication that the demand for homes isrnrecovering. However, it is important to remember that affordability isrna three-legged stool. Mortgage rates, home prices, and householdrnincomes all impact affordability. Today, mortgage rates remain nearrnrecord lows, and with the continued decline in home prices, for thosernwith resources, it is a buyers’ market like we haven’t seen in years.rnObviously, the problem is that there are not enough potentialrnhomebuyers who have the income and downpayment, and who feel confidentrnboth that the housing market will recover, and that their job situationrnis secure, to boost demand despite the improvements in affordability.”

MBA economists expect long termrnmortgage interest rates to raise slowly from the average of 4.9 percent expectedrnfor the fourth quarter to 5.2 percent in the first quarter of 2010 and 5.7rnpercent in the fourth quarter.  Ratesrnwill climb to 6.0 percent during the second quarter of 2011.

One year adjustable rates arernprojected to be almost completely flat over the next year.  At 4.6 percent this quarter, they will tradernbetween 4.7 and 4.8 percent throughout 2010 and rise to an average of 5.3rnpercent in 2011.

At the same time, sales of existingrnhomes, estimated at nearly 5 million this year will continue at that pace throughrnthe first three quarters of 2010 before increasing in the fourth quarter for totalrnof 5.55 million sales for that year. rnSales are expected to reach 6 million in 2011.  

New home sales, projected tornreach an estimated annualized rate of 442,000 in the fourth quarter and 391,000rnfor the year will move around in a narrow annualized range of 468,000 torn508,000 during the four quarters of 2010 and finish the year with aroundrn483,000 sales. New home sales will total 609,000 in 2011.

All of the above outlined circumstances arernexpected to result in a slow year for mortgage originators with purchasernmortgage originations increasing but not strongly enough to make up for arnplunge in refinancing.  It is expectedrnthat purchase mortgages will total 718,000 for this year; 804,000 in 2010 andrn896,000 in 2011.

During the fourth quarter it isrnexpected that 238,000 households will refinance.  This will be the slowest quarter of the year,rndown substantially from the 426,000 transactions in the second quarter andrn296,000 in the third.  The estimate forrnthe entire year is 1,246,000 refinances. rnHowever, next year with interest rates up and much of the demand forrnrefinancing wrung out of the system the number of refinances is expected tornplummet to little more than half the 2009 number; 2010 will be even worse.  Refinancing in the first quarter of 2010 willrnbe 175,000 units compared to 287,000 during the first quarter of this year andrnthe total in Q4 will be 140,000 compared to 238,000 this quarter.  MBA is projecting a total of 693,000rnrefinances in 2010 is estimated at 693,000 and in 2011 the total will bern591,000.   

The last bit of data in the MBArnforecast is its housing price prediction. rnThe association sees the median price tag for new homes increasingrnmarginally from $211,500 this year to $213,300 in 2010 and $217,600 inrn2011.  The median price in 2008 wasrn$231,900

Existing homes will fare aboutrnthe same.  The median price will risernfrom $171,700 to 173,600, to $178,800 over the next three years.  The median price in 2008 was $198,100.

MND managing editor, Adam Quinones, has yet to provide his mortgage rate outlook beyond Q1 2010rnbecause of a large amount of unknown variables currently clouding the marketplace.rnThese include:

• The January 1 implementation of FAS 166/167
• The possiblernextension of the Fed's MBS purchase program
• The termination ofrnseveral other Fed liquidity facilities including reciprocal currencyrnswaps, the TSLF, ABCP, TAF, the PDCF, and TALF.
• The sale of the Fed's assets. Althoughrnthe Fed has discussed the reverse repo program, the market has yet tornlearn of the timing of the Fed's strategy to sell the assetsrnaccumulated during the Quantitative Easing process (MBS and Treasuriesrnspeficifically).
• The market's perception of inflationrnand its relation to the budget deficit are working against each other.

Quinones has however stated that he sees itrnvery possible that the 2s/10s yield curve could test all time steepness spreads as the 10yr approaches 4.00%, which would likely push par 30 year mortgage rates up to 5.50% by the endrnof Q1 2010. This assumes the Fed will not find reason to extend the MBS purchasernprogram and that the market would not price in a “double dip” (if the Fed extends the program it is because the economy needs them to extend it. If the Fed does decide to extend the MBS purchase program, it would imply the economy is failing to grow or taking a turn for the worse. Looking further out, Quinones does believe “double dip” risks remain high due to the overhang of unemployment, continued resource utilization slack, and stagnate housing demand.

HERE is the table outlining the MBA's forecasts.

Here are Housing and Mortgage Data Updates from the MBA:

• Construction spending remains extremely weak, particularly for multifamily buildings.  Single family starts decreased to 470,000 in October from 511,000 in September.  Single family starts remain more than 70 percent below their peak at the height of the boom. Multifamily starts fell to a record low of 48,000 units in October from 72,000 in September, and now more than 85 percent below their peak level.
• Home sales continue to recover.  Existing homes sales increased by 10.1 percent in October to 6.1 million at a seasonally adjusted annual rate.  New home sales increased by 6.2 percent to 430,000 in October.
• Inventories of unsold homes have declined appreciably in recent months.  The months supply of existing homes for sale decreased from 8 months in September to 7 months in October.  For new homes, the months supply decreased from 7.4 months in September to 6.7 months in October.  There were 239,000 new homes on the market in October, down from a peak above 570,000 in July 2006.
• Home prices continue to be impacted by the substantial overhang of excess supply in the market.  FHFA’s purchase only index was unchanged at the national level from August to September.  MBA forecasts that home prices will increase about 1 percent in 2010 after reaching a trough in 2009.
• According to MBA’s Weekly Application Survey, 30-year fixed mortgage rates steadily declined through November, falling 18 basis points relative to the month prior and ending November at 4.79 percent. 15-year mortgage rates reached a new record low for the survey of 4.27 percent.  The share of borrowers choosing the 15-year has increased over the course of 2009 as a result of the widened spread between 15- and 30-year loans.  MBA forecasts that 30-year mortgage rates will increase through 2010 to end the year at 5.7 percent.
• On a seasonally adjusted basis, purchase applications declined almost 20 percent from October to November.  Refi apps increased by about 1 percent over that time.
• MBA projects that mortgage originations will decrease from almost $2.0 trillion in 2009 to about $1.5 trillion in 2010.  MBA forecasts that purchase originations will increase from $718 billion in 2009 to $804 billion in 2010, while refinance originations are projected to fall from $1.246 trillion to $693 billion.
• The Federal Reserve and U.S. Treasury mortgage purchase programs continue to dominate the secondary market.  In November, Federal Reserve purchases of agency MBS accounted for about 80 percent of new MBS issuance from Fannie Mae and Freddie Mac.

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