Magazine article Mortgage Banking

Miles to Go

Magazine article Mortgage Banking

Miles to Go

Article excerpt

There's more good news than bad in the economic and residential mortgage market forecast for 2016. Job growth and household formation numbers are the stars. Even so, there's still room for improvement.

For the first time since the housing crisis, the economy has regained its footing. We are at full employment, with an unemployment rate at a level that should stimulate meaningful wage growth. However, the housing market still has miles to go before it reaches a pace of home sales consistent with the strength in the broader economy and job market. [paragraph] In this environment, mortgage rates are likely to increase, but only gradually, as the Federal Reserve slowly lifts its target rate off of zero. [paragraph] In addition to the strong economic foundation, demographic trends have also turned quite positive, and we expect they will remain so for at least the next decade. Household formation has picked up substantially, and it seems likely that the homeownership rate will level out and perhaps increase from here. [paragraph] We project that home purchase originations will increase in 2016 as the U.S. housing market continues on its path toward more typical levels of turnover based on steadily rising demand and improvements in the supply of homes for sale and under construction. Tight inventories have led to faster home-price growth than anticipated. Our forecast has purchase volume continuing to increase over the next several years, topping $1 trillion in purchase originations by 2018.

Refinance volume will likely drop as rates increase, and given that many homeowners took advantage of record low rates over the past few years. As a result, total origination volume will be somewhat lower than in 2015, and should be increasingly geared toward purchase over the next several years.

There are many risks to this forecast, and we take time at the end of this article to outline some alternative scenarios. A stronger economy would likely be coupled with rates rising more rapidly, while a weaker economy would likely see rates stall near their current level. We expect that 2016 will be a good year for many Mortgage Bankers Association (MBA) members.

U.S. economy

As of this writing, 2015 has seen solid but slowing growth as measured by gross domestic product (GDP). Major components of GDP have shown growth in the first three quarters of 2015, but for the most part these growth rates were slightly weaker than the comparable period in 2014. However, we have seen the job market continue to improve and unemployment has fallen to the lowest level in years.

In terms of what is driving GDP growth, consumer spending remains the largest contributor to growth, followed by business fixed investment and residential investment.

The Bureau of Economic Analysis' (BEA's) most recent estimate of third-quarter 2015 GDP growth showed that the U.S. economy grew at a rate of 2.1 percent, down from a 3.9 percent growth rate in the second quarter. The third-quarter estimate featured a robust 3 percent growth in personal consumption expenditures (PCE). PCE growth in the third quarter accounted for 2.05 percentage points of the overall growth rate. Consumers continue to benefit from more stable employment conditions, a stronger dollar and lower fuel prices.

Businesses saw an increase in spending in the third quarter as well, driven by investment in equipment--specifically information processing equipment such as computers. Investment in structures showed a decline for the quarter. Residential fixed investment saw positive growth for the sixth consecutive quarter, and we expect this trend will continue over the next few quarters as the housing sector continues its recovery.

Net exports were essentially neutral to growth in the third quarter, subtracting 3 basis points from the overall growth rate. Exports were relatively weak, but imports--which subtract from GDP--have been increasing. …

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