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The Dual Headwinds of the Mortgage Market

mortgageHigher mortgage rates are weighing on refinance activity and, despite an increase in purchase origination volume, are likely to slow total originations by 6.4 percent to $1.75 trillion according to Freddie Mac’s June Forecast.

While rising mortgage rates are one of the key factors to affect total originations, the ongoing housing supply crunch is the other headwind that’s affecting not only homebuyers but the mortgage market also.

According to Freddie Mac’s forecast, the first of the year has been fraught with weaker affordability, though higher mortgage rates and home prices, as well as low levels of new and existing homes for sale. “This, in turn, has kept the sales growth in check despite the fact that the healthy economy is generating solid levels of demand,” the study found.

The forecast predicts that steady hiring will continue to support higher wage growth, which in turn should spur consumer spending and business investment. It expects the overall GDP growth at 2.6 percent by the end of 2018.

Despite a low season in the first half of the year, the Freddie Mac forecast predicts an increase of 2.8 percent in home sales by the end of the year, whereas home price appreciation is likely to end the year at 6.6 percent.

Homeowners have come out winners in this tough, competitive market according to Sam Khater, Chief Economist, Freddie Mac. “Rising home values continue to build [homeowners’] household wealth, and those who decided to sell likely found a buyer very quickly,” Khater said. “Meanwhile prospective buyers are active and looking in most markets but supply is low, competition is swift and higher mortgage rates and home prices are squeezing the budget of some prospective buyers.”

The forecast revealed that supply and demand imbalances are keeping home sales in check and causing prices to increase at a swift pace. In the meantime, the economy is likely to continue to operate in a rising rate environment with mortgage rates expected to touch 4.9 percent by the end of 2018, the forecast projected.

“For lenders, the shift is underway to focusing primarily on the purchase market because of the year’s tumble in refinancing activity,” Khater said.

The forecast said that refinance activity, which already declined by $300 billion from 2016 to 2017, is projected to decline by another $175 billion in 2018. Higher home sales and house price appreciation will drive purchase origination volume up by $60 billion, but not enough to offset the decline in refinances. Full-year originations are therefore forecasted to fall in 2018 to $1.75 trillion and stabilize at $1.74 trillion in 2019.

About Author: Radhika Ojha

Radhika Ojha, Online Editor at the Five Star Institute, is a graduate of the University of Pune, India, where she received her B.A. in Commerce with a concentration in Accounting and Marketing and an M.A. in Mass Communication. Upon completion of her master’s degree, Ojha worked at a national English daily publication in India (The Indian Express) where she was a staff writer in the cultural and arts features section. Ojha also worked as Principal Correspondent at HT Media Ltd and at Honeywell as an executive in corporate communications. She and her husband currently reside in Dallas, Texas. You can contact her at Radhika.Ojha@theMReport.com.

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