Ralph DeFranco is the Chief Economist at Arch Mortgage Insurance. DeFranco leads Arch MI’s forecasting of regional housing prices, overall regional housing market risk, and development of the company’s mortgage claim and pricing models. He also authors the quarterly Housing and Mortgage Market Review (HAMMR) on the state of the nation’s housing sector. DeFranco recently spoke with MReport about some predictions for the housing market for 2017, including origination volumes, mortgage rates, and the homeownership rate.
Some in the industry, such as Freddie Mac, are predicting lower origination volumes next year compared to 2016. What is your outlook for mortgage originators?
I like the standard conventional wisdom that rates are going to be gradually rising, so that means that we are going to see a steep drop in refinances. At the same time, the purchase market is growing, so it may grow by 10 or 15 percent next year from this year. The MBA is predicting a 20 percent increase in the purchase market. The reasons for that would be higher home prices, but also there is a slightly lower share of loans purchased that are all cash each year, so there will be a few more actual mortgages within the same number of transactions. But then also the homebuilding is ramping up. Between homebuilding, fewer all cash purchases, and higher home prices, you get higher seller volume on the purchase front. All in, we're still expecting a decline when you add up the purchase and refi. They'll probably be down slightly, but it's hard to say. It depends on how fast interest rates move up. These things really should have very wide ranges around them, because the interest rate uncertainty is so large.
What role will foreign homebuyers play in the market in 2017?
If the dollar weakens, that will increase the number of foreign buyers. The foreign buyers are concentrated in certain areas. Foreign buyers have a small impact on the country as a whole, but they have an impact in certain areas, such as the West Coast—particularly in the upper middle class and higher end neighborhoods. They tend to buy houses that are almost twice as expensive as the median house in their markets, so they tend to be on the upper end of the quality scale.
Why is there a higher risk of home price decline in the "energy patch"?
Job growth has been falling. There are some areas of the country where there has been job losses. That includes North Dakota, Wyoming, and some smaller cities within other states. Those areas have still seen positive home price growth, but the risk is higher that there will be stagnation or a slight decline. The reasons behind that are the boom in tracking hasn't fully unwound. There still layoffs and still over-effects from the slowdown in that sector that are still occurring.
What do you think is going to be the effect of this new administration on the country's homeownership rate, which hit a 51-year low in Q2?
The trend has been downward, and part of that is because there are still foreclosures. Basically 0.9 percent of all mortgages are still in the foreclosure process, and most of that is left over from the housing crisis. As that finishes getting mopped up at the tail end of the foreclosure process, that is actually probably going to continue. The homeownership rate will likely decrease in the near term. What happens in the longer term will depend on what housing policies Trump puts in place. My sense is that he's going to help on the demand side of the equation. For example, it will likely ease credit availability. There are good quality borrowers out there that have had difficulty getting a mortgage because of very tight regulations. I expect a lot of that is going to be reversed. An increase in infrastructure spending and tax cuts will be stimulative, and that will help the homeownership rate. Trump has talked about increasing supply, but it's not clear how he can do that. Most of the restrictions on housing are local, so they won't be able to have too strong of an effect on that.
President-elect Trump has talked about easing regulation on the housing industry. Do you think that will have a positive or negative or negative effect?
It will increase demand, but if supply doesn't increase as well, what you'll see is home prices will go up even faster than they currently are. They're up around 5 percent year-over-year, which is faster than incomes have risen, so affordability is getting a little squeezed. If you loosen the underwriting guidelines a little bit, nothing like what we had back in the crisis, but if you open up the credit box some, that would increase demand even more, which would push up home prices even faster.
What do you think will happen with mortgage rates in 2017?
Our economy is actually standing pretty well. The U.S. has created about 2.5 million jobs over the last year. Interest rates should actually be much higher than they actually are right now. They’ve just been artificially suppressed by weakness overseas and concern over things like Brexit.
Where they are headed is a harder question to answer after the election, because there is so much uncertainty about what a Trump Administration is going to do and what policies he is going to pursue. I personally think that they will probably rise faster than previously forecasted, because I expect that with a Republican Congress and president, they’re going to push forward with a large tax cut and large infrastructure spending, both of which will be positive for the economy, which would push interest rates up faster than they would be without those.”
Will mortgage rates rise gradually over the next year? Will they get above 4 percent?
That is a really tough one to call. We were thinking mortgage rates would average about 4 percent for next year. That was before the election. Now I think there is a much wider range around what could happen, and I expect it will be variable. It probably won't go in a straight line gradually upward. It may lurch forward or lurch down based on surprises to the market, like trade friction or bellicose language against Iran. Who knows how the markets will react to that sort of thing?
If there is increased uncertainty, that typically benefits mortgage rates. It keeps them lower than they normally would be. But a big tax cut and a big infrastructure bill, if those pass or even seem likely to pass, what would push rates up higher. I wouldn't expect them to skyrocket. I would say rates are probably going to be perhaps a half a percentage point higher next year compared to this year. That's not the end of the world in terms of affordability, but it does mean that people should move sooner rather than later.