BLOG VIEW: Here we are in the third month of 2017 and the economy looks absolutely terrific. From sea to shining sea, a lot of things are going right. Such good news suggests huge numbers of people are ready, willing and able to finance and refinance real estate.
As evidence, consider the following recent bits of news:
- In January, the median home price reached $228,900, according to the National Association of Realtors. That’s up 7.1% from a year earlier and the 59th consecutive month of year-over-year gains;
- Mortgage origination volume in 2016 was at the highest level seen in nine years, according to Black Knight;
- At 3.65%, the average mortgage rate in 2016 set a record low;
- The Dow has breached 21,000, up from 18,251.38 on Election Day. “The stock market has gained almost $3 trillion in value since the election on Nov. 8,” President Donald Trump told Congress in his recent address;
- Under the Obama administration, 11.25 million jobs were added to the economy. The unemployment rate is now just 4.8% – plus, there are some 5.5 million job openings; and
- Bank profits reached $171.3 billion last year, which is a record.
As the expression goes, what’s not to like? The financial news is wonderful. What could possibly go wrong?
According to Freddie Mac, a lot. Mortgage originations in 2016 reached $2.125 trillion, it says, which is a big number. But for 2017, Freddie expects originations to fall substantially, down to $1.545 trillion. As things now stand, the government-sponsored enterprise projects originations of just $1.5 trillion in 2018.
The Mortgage Bankers Association (MBA), in a similar vein, projects that originations will fall from $1.89 trillion in 2016 to $1.57 trillion in 2017 to $1.58 trillion in 2018.
Why so glum? Because the essential mortgage story in 2017 is likely to revolve around three issues: history, rates and uncertainty.
The good news from 2016 was real, but it also creates a curious problem: The bar has been set awfully high.
Part of the reason for the expected slowdown in 2017 originations is simply that the past few years have been terrific for borrowers. The MBA expects refinancing volume to fall from $901 billion last year to $471 billion in 2017.
“After previous waves of refinancing over the past three years,” the MBA says, “a large portion of borrowers have locked into lower rates, and there are fewer left to take advantage of current rate levels. We expect that remaining refinance borrowing will be from borrowers still rebuilding home equity or borrowers who might want a cash-out refinance. However, as rates begin to rise, existing borrowers with record-low interest rates may be hesitant to use cash-out refinancing as a means of accessing their home equity.”
For the mortgage industry, reduced origination levels can spell big problems. Fixed costs increase per loan when there are fewer originations. Meanwhile, increasingly higher levels of automation can speed processing, which is good news in general but could, perhaps, result in a reduction of the ranks of loan officers and processors.
“The general consensus is that mortgage rates will rise in 2017,” says Rick Sharga, executive vice president at Ten-X.com, an online real estate marketplace. “You can explain to borrowers that rates today remain near historic lows and are nowhere near the levels seen in 1981 (16.63 percent) or even 2000 (8.05 percent), and yet, for many mortgage shoppers, the only measure which seems to count is that rates today are higher than they were six months ago, which means that their monthly payments will also be higher.”
A rising-rate environment seems almost preordained in 2017. Standard & Poors had thought the Fed would raise bank rates twice in 2017 but now thinks three times will be the charm. With a .25% increase with each hike, that’s an additional .75% that will be tacked on to the prime rate. Combined with the Fed hike in December, we’re talking about a 1% increase in a period of a year or so.
“In general,” explains The New York Times in a recent article, “movement of the Fed’s rate does not have a large, direct impact on long-term mortgage rates. But when the Fed’s rate goes up, banks find ways to pass their higher borrowing costs along to consumers.”
The catch, of course, is that non-banks increasingly dominate the mortgage marketplace, organizations that do not borrow from the Fed. Given that interest rates worldwide are often in negative territory at this time, there’s reason to believe that mortgage rates will not move in lockstep with the Fed. Trillions of dollars in investor money is out there, and it’s cheap. Still, you can bet that Fed rate hikes will get a lot of attention, attention that, by itself, will scare off some potential borrowers.
You can’t look at today’s rate environment and ignore what’s going on in Washington. The federal government owes nearly $20 trillion at this writing, so how will it change under the new administration? Will there really be a $1 trillion infrastructure program? If yes, how will it be funded? Will tax rates go down? If yes, what happens with the deficit?
While we’re at it, what happens with Dodd-Frank? How about Fannie Mae and Freddie Mac? What about a tax cut? Will the Federal Housing Administration premium cut be brought back to offset higher mortgage rates?
These are actually small questions. Bigger issues include such things as what happens next in Ukraine or the Middle East. Will we have a trade war with China or Mexico? Will the price of oil increase?
As we enter 2017, you’d have to say we’re doing awfully well. Who thought the Dow would top 21,000? Maybe the predictions will be wrong and the mortgage industry will do great in 2017.
Welcome to the year of uncertainty.
Peter G. Miller is a nationally syndicated real estate columnist. His books, published originally by Harper & Row, sold more than 300,000 copies. He blogs at OurBroker.com and contributes to such leading sites as RealtyTrac.com, the Huffington Post and Ten-X. Miller has also spoken before such groups as the National Association of Realtors and the Association of Real Estate License Law Officials.