Fannie Mae: Low Rates Will Boost Refinance Volume in 2019

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While consumer demand for housing remains strong, limited inventory, particularly on the affordable end, continues to hold back the single-family purchase market, according to a recent report from Fannie Mae’s Economic and Strategic Research (ESR) Group.

The good news for mortgage lenders, of course, is that lower rates are boosting refinance volume – a trend that is expected to continue through the remainder of this year. The ESR Group is currently forecasting that the refinance share of total mortgage volume will reach 35% this year, up from 29% in 2018.

Meanwhile, storm clouds are gathering on the global economic front, as recent trade wars threaten to cause ongoing volatility in the financial markets, possibly weakening the labor market and diminishing consumer confidence.

Despite this instability in the global markets, Fannie Mae is nonetheless expecting a strong second half for 2019. The ESR Group is currently forecasting headline growth to increase slightly to 2.2%.

What’s more, the Group is calling for two more quarter-point interest rate cuts by the Federal Reserve in 2019, one in September and another in December.

Consumer spending continued to be the primary driver of growth in the second quarter, increasing to its strongest pace since the end of 2017, according to the ESR Group.

By contrast, residential fixed investment dragged for a sixth consecutive quarter, while business investment turned negative in the face of increasing trade and geopolitical uncertainty.

“Though the current expansion recently became the longest on record, reverberating trade tensions and general economic uncertainty continue to weigh on growth,” says Doug Duncan, senior vice president and chief economist for Fannie Mae, in a statement. “The persistent trade tensions between the U.S. and China threaten to further reduce business investment, disrupt equity markets, degrade household wealth, and diminish consumer spending, the country’s primary economic engine of late.

“To help shield financial markets, buoy consumers, and perhaps nudge inflation slightly higher, we now expect the Fed will cut interest rates by 25 basis points two more times in 2019, up from our previous prediction of one,” Duncan says.

Due to falling mortgage rates, Duncan estimates that 35% of outstanding mortgages are currently “in the money,” meaning borrowers may realize significant cost savings by refinancing.

“As such, we expect the share of refinance originations to grow through the remainder of the year,” he says. “However, while existing homeowners may be able to enjoy the benefits of lower interest rates, many would-be homeowners, and the purchase mortgage market generally, remain unable to capitalize on the favorable rate environment due to the chronically limited supply of homes available for sale.”

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