MBA Forecasts a Rise in Home Purchases and a fall in Mortgage Supply in 2018

The U.S housing sector has been a hot topic since the Global Financial Crisis, a tightening labor market being a driving force behind supply issues across the U.S., with the housing sector recovery leading homeowners to hold on to assets constraining supply, adding fuel to the fire of rising prices.

The Mortgage Bankers Association (“MBA”) annual convention held through the middle of this week had a tone of optimism, despite poor margins and mortgage volumes through the current year and further declines projected next year.

Expectations are that 2018 will see yet another fall in total mortgage applications from $1.69tn this year to $1.60tn next year, before an anticipated recovery to $1.64tn in 2019.

There’s certainly good rationale behind the projections, with the FED’s plans to continue moving towards monetary policy normalization expected to impact negatively on mortgage applications and mortgage refinancing in particular, as mortgage rates look set to be on an upward curve alongside U.S interest rates.

How the FED moves through 2018 will be key and, while we expect the doves to continue to rule the roost over the near-term, wage growth will also be a key consideration for the FED through 2018 and beyond. We have seen wage growth pick up to a certain degree from tepid growth in recent years, stemming from a tighter labour market and is expected to continue to rise, supported by the FED’s projected fall in the unemployment rate to 4.1% for both 2018 and 2019 and the FED anticipated rate hikes at the end of the year and through 2018.

Downward pressure on mortgage rates could materialize through 2018 and 2019 should U.S economic growth be in line with the FOMC’s economic growth projections for 2018, the economy forecasted to grow by 2.1%, down from this year’s 2.4% projection.

Supply and demand remain the key driver for house prices, with a projected upward trend in house prices anticipated through continued supply constraints, which will impact, not only refinancing but also new mortgages, with wage growth unlikely to keep up with the pace of rising house prices.

Housing sector data out of the U.S on Wednesday reported an 18.9% surge in new home sales in September and that’s quite a number considering the constraint issues faced in the sector. There is certainly an urgency in purchasing as there has been with refinancing and adding to these concerns will be who becomes the next FED Chair, a more hawkish John Taylor likely to put the cat amongst the pigeons for mortgage rates, whilst a deregulation within the financial sector may soften the blow to a certain extent.

The housing sector has been considered a barometer of the U.S economy since the crisis and how the sector performs will influence consumer confidence and U.S economic growth. The housing sector recovery having supported increased domestic consumption through the current year.

While expectations are for housing prices to continue to rise, there will likely to be a crossroads for homeowners riding on the housing sector recovery and rising mortgage rates will be a factor. The big question will be how quickly mortgage rates will rise. The good news is that the current FED projections remain favorable and, while Trump may look for a John Taylor presence in the FED, giving him the reigns may be a step too far for the U.S President, who has been the beneficiary of improving economic conditions supported in part, by increased optimism across the country.

For new home buyers, the concern will be in the FED’s possible shift in monetary policy should inflation begin to pick up, which could lead to a more marked increase in mortgage rates, though 30-year mortgage rates are expected to remain at sub-5% levels for the foreseeable future. For now, secondary homeowners are likely to enjoy the benefits of rising wage growth through rental income, which will be a negative for those looking to enter the market, with the savvier investor having refinanced ahead of the ongoing shift in the yield curve.