A strong housing market, robust demand and rising home prices are causing purchase originations to increase, and as the market switches from refinances to purchases, the Mortgage Bankers Association predicts this year could hit record highs when it comes to purchase originations.
The MBA announced Thursday at its Spring Conference and Expo 2021 that purchase originations are on track to grow 16.4 percent to a new record of $1.67 trillion in 2021. And this increase will only be tempered by a lack of housing supply.
“I think the operative word right now is that we’re in a period of transition,” Mike Fratantoni, MBA chief economist and senior vice president for research and industry technology, said at the conference in the Market Outlook session. “We’re moving from last year, which was all about the pandemic, this year all about the vaccine. More than a quarter of the population now has been vaccinated – that is going to have a tremendous impact on every number we looked at. We’re moving from a period last year of an incredibly sharp recession, to one this year of an incredibly robust recovery. Last year, and beginning of this year, was a lot about fiscal stimulus packages from the federal government and from the Federal Reserve to try to boost the economy through this unprecedented pandemic time. This year we’re moving to more longer-term investments of the infrastructure package that’s been talked about several times as part of this conference.”
On average last year, the economy lost about 800,000 jobs per month, but Fratantoni said that in 2021, that quickly turned around. He estimates that the economy will gain about 3 to 4 million jobs over the next several months, predicting the unemployment rate will fall to about 4.5 percent.
Overall, Fratantoni expects this year to be strong, hitting record highs for purchase originations as more Americans enter the homebuying market, saying people are ready to spend as soon as things open.
“The housing market is incredibly strong this year, with robust housing demand in nearly every part of the country, driven by the improving economy, households seeking more indoor and outdoor space, millennials reaching their prime homebuying years, and still low mortgage rates,” Fratantoni said. “A lack of supply is the biggest hurdle to an even larger increase in home sales. The widening imbalance of supply and demand is driving up home-price growth and eroding affordability – especially for entry-level buyers.”
But despite this increase in purchases, overall, originations are expected to decline from last year’s record highs. After last year’s record $3.83 trillion in mortgage originations, MBA forecasts volume to fall 14 percent this year to $3.28 trillion, which would still be the third-highest total ever. Mortgage rates are expected to continue rising to around 3.7 percent, contributing to a further slowdown in refinance demand. Refinance originations are expected to fall by 33 percent to $1.62 trillion.
In their most recent forecast, Fannie Mae and Freddie Mac agreed the housing market is about to face a slowdown due to decreased refinances driven by higher interest rates.
“Refinance volume has already trailed off because of the steep climb in mortgage rates since January,” Fratantoni said. “Mortgage lenders should continue to prepare for the transition to a strong purchase market and slowing refinance activity.”
According to Fratantoni, the American Rescue Plan and vaccine rollout will continue to provide a lift to the economy, households and businesses through the summer. He expects economic growth to jump to 6.5 percent this year, a vast improvement from the pandemic-induced contraction of 2.4 percent in 2020.
“The economy will continue to recover, with rapid job growth, particularly in the hardest-hit, service sectors of the economy,” Fratantoni said. “The job growth is certainly positive, but this environment sets the stage for higher mortgage rates and faster inflation. However, if housing inventory levels improve and help to keep affordability in check, home sales should remain strong into 2022.”
During the panel, Marina Walsh, MBA vice president of industry analysis explained that data from the first quarter of this year is already showing a decrease in housing activity and, therefore, in lender profits.
“While some companies are still working through their pipelines, there could be a radical change that may require changes in terms of staffing or renewed focus on the purchase market,” Walsh said.
And some mortgage lenders are already making adjustments in preparation for the slowdown.
“When it comes to needing to meet the bottom line targets, sometimes it means adjusting capacity; it means adjusting personnel and making those changes quickly,” Walsh said. “Historically, independents have been better at doing that than banks and making those decisions quickly, because they have to. If you’re not making money in mortgage, then you’re not making money as a company and that’s not sustainable. So there will be some tough decisions, but what I’m hearing now that they’re doing is really cutting back on overtime.”