Economy Faces Weak Q1 but Expected to Improve

According to the Mortgage Bankers Association’s Economic and Mortgage Finance commentary for May 2015 written by Joel Kan, associate VP, industry survey and forecasts at MBA, economic growth struggled its way through the first quarter.

Kan believes that Q1 was mostly impacted by the stronger US dollar, lower exports, as well as trade and inventory disruptions on the West Coast. On the other hand, low retail sales signified that consumers were not spending much in Q1, and a decline in industrial production could be a sign that businesses are not motivated to increase production and invest.

“We still believe that some of these are temporary factors and that domestic growth will pick up in the second quarter, given that the job market remains strong and there has been upward pressure on wage growth,” Kan said. “Because rates have been low for most of 2015 until recently, we revised our refinance originations estimate upward for both the first and second quarters due to higher than expected MBS issuance data and strong refinance applications in the months of February, March, and April.”

In his commentary, Kan mentions that refinances are expected to be $551 billion in 2015, compared to a previously estimated $510 billion. MBA now estimates a total of $1.28 trillion in mortgage originations for 2015, compared to $1.12 trillion in 2014. Purchase originations are expected to increase to $730 billion in 2015 from $638 billion in 2014.

“The BEA’s advance estimate of first quarter growth was a paltry 0.2 percent, the slowest quarter of growth since the first quarter of 2014,” Kan said. “We and others are becoming increasingly skeptical that the government’s seasonal adjustment process is fully capturing typical first quarter weakness.  This is another reason we are less worried by slower reported growth in Q1.”

Although interest rates have been low mostly placing concern on economic growth, the MBA expects rates to increase through the course of the 2015 and the Fed will raise rates in September as the economy and job market grow stronger.

“A strong job market leading to sustained wage growth is a factor that drives household formation and that is expected to pick up this year, providing a lift for housing,” Kan said. “We now look to the purchase market to drive the overall housing outlook. Rental vacancies remain low and rents continue to increase, and with home prices still increasing, it is likely that more buyers and sellers will return to the market in the short term.”

“However, a differentiated purchase market remains, as higher loan size tiers are growing more rapidly than the lower loan tiers, a sign that entry level and first time buyers still face hurdles,” Kan said. “Even though lower rates have brought additional refinance borrowers into the market and caused us to raise our originations estimates for 2015, refinance activity has been extremely low in recent weeks, as mortgage rates hovered around the 4 percent level.”