Economists at the Mortgage Bankers Association and mortgage giants Fannie Mae and Freddie Mac are predicting that growth in housing sales and price stability will boost demand for purchase mortgages next year.
Because real estate agents’ commissions are tied to the selling price of homes in which they represent buyers and sellers, trends in purchase loan originations correlate well with commissions, although many sales during the downturn have been all-cash deals to investors who also pay agent commissions.
The Mortgage Bankers Association expects purchase loan originations to grow by 16 percent next year, to $585 billion from an estimated $503 billion in 2012.
Growth in new-home sales, modest home price increases, and more financed, owner-occupied sales rather than cash investor sales will drive 2013 purchase originations, said Jay Brinkmann, MBA’s chief economist, in a statement.
In their latest forecast, Fannie Mae economists predict sales of new and existing homes will climb by 4.2 percent next year, to 5.19 million homes, with even more dramatic 11 percent growth in purchase loan originations, to $567 billion. That growth would come on top of projected 9 percent growth in 2012 home sales.
"The strength in the recent home price trend reflects both improving fundamentals as well as seasonality, which causes the share of distressed sales to decline in the spring and summer months," Fannie Mae economists Doug Duncan, Orawin Velz and Richard Koss said in their latest economic outlook. "We expect to see some deterioration in home prices as we move into the winter months, but we continue to believe that prices reached bottom in the first of quarter of this year."
Economists at Freddie Mac expect sales of new and existing homes to climb 7.2 percent from this year to next, to 5.35 million, and to build on that momentum in 2014 with an additional 8.4 percent increase to 5.8 million sales.
While Freddie Mac sees total loan originations falling from $2 trillion this year to $1.65 trillion in 2013 and $1.2 trillion in 2014, that’s due to expectations that the refinancing boom under way now will wind down. Freddie Mac predicts purchase loans will account for 40 percent of all originations next year and 60 percent in 2014, up from 30 percent this year. So while total originations will decline, Freddie Mac is also forecasting steady growth in purchase loan originations.
The recovery could still be derailed by slowing economic growth in Europe and China and the so-called "fiscal cliff" — a series of spending cuts and tax increases set to go into effect Jan. 1 unless U.S. lawmakers come up with an alternative plan for tackling deficit spending.
In an attempt to give the U.S. economy some momentum, the Federal Reserve is boosting holdings of longer-term mortgage-backed securities and Treasurys by about $85 billion a month through the end of the year, in the hopes of putting downward pressure on longer-term interest rates and supporting mortgage markets.
Fannie Mae economists think that a third round of quantitative easing ("QE3") announced by the Fed on Sept. 13 to boost MBS purchases by $40 billion a month could last through all of 2013 and perhaps into 2014, adding $1 trillion to the Fed’s portfolio.
"This should create a massive demand in MBS, drive up their prices, reduce their yields, narrow the secondary mortgage spreads significantly, and effectively drive primary or retail mortgage rates lower," Fannie Mae economists said in predicting that rates on 30-year fixed-rate mortgages will average 3.4 percent next year, down from 3.6 percent this year.
Given continued tight lending standards and a slowly improving job market, lower mortgage rates won’t have a huge impact on home sales, but could help stimulate the economy by freeing up discretionary income for homeowners who are able to refinance, "allowing them to spend more, save more, or pay down their debt," Fannie Mae economists said. "While using the extra cash flow to increase savings or to pay down the debt does not lead to increased demand for goods and services in the short run, it allows households to strengthen their balance sheets, positioning them for spending more in the future."
Housing is "resuming its traditional role of leading the recovery charge and once again being the bright spot in the economy. With QE3 in motion we should see even more pickup in housing activity thereby providing greater benefits to the overall economy and consumers looking to refinance or purchase a home," said Frank Nothaft, Freddie Mac’s vice president and chief economist, in a statement.
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