The Mortgage Bankers Association (MBA) is expecting total mortgage origination volume to decline to $2.05 trillion in 2023 from the $2.26 trillion expected in 2022.
Purchase originations are forecast to decrease 3% to $1.53 trillion next year, while refinance volume is anticipated to decline by 24% to $513 billion.
According to Mike Fratantoni, MBA’s chief economist and senior vice president for research and industry technology, the likelihood of a recession, the Federal Reserve’s continued actions to tame inflation and ongoing affordability challenges will slow homebuyer demand and purchase origination volume in 2023.
“Next year will be particularly challenging for the U.S. and global economies. The sharp increase in interest rates this year – a consequence of the Federal Reserve’s efforts to slow inflation, will lead to an equally sharp slowdown in the economy, matching the downturn that is happening right now in the housing market,” says Fratantoni. “MBA’s forecast calls for a recession in the first half of next year, driven by tighter financial conditions, reduced business investment, and slower global growth. As a result, the unemployment rate will increase from its current rate of 3.5 percent to 5.5 percent by the end of the year. Inflation will gradually decline towards the Fed’s 2 percent target by the middle of 2024.”
Fratantoni believes that as the economy slows, longer-term rates, including mortgage rates, will begin to fall from current peak levels. However, there will continue to be significant volatility in rates in the near-term due to quantitative tightening by the Fed and other central banks, and as markets grapple with significant geopolitical, economic, and monetary policy uncertainties.
After more than doubling so far in 2022, MBA’s baseline forecast is for mortgage rates to end next year at around 5.4%.
“The slowdown in housing activity and higher mortgage rates will quickly cut the rate of home-price growth. MBA expects national home prices will be roughly flat in 2023 and 2024, allowing household incomes some much-needed time to catch up to elevated property values,” states Joel Kan, MBA’s vice president and deputy chief economist. “However, many local markets will see home-price declines, even if national price measures remain largely unchanged.”
Kan believes that first-time homebuyers will account for a large portion of housing demand over the next few years, given current demographic patterns and the fact that many existing homeowners will be dissuaded from moving by virtue of having much lower rates on their mortgage. The combination of still-low levels of for-sale inventory and slowing new construction activity means that housing supply is likely to remain constrained for some time.
Marina Walsh, the MBA’s vice president of industry analysis, notes that production profitability will be negative in 2022 for the first time since 2018.
“Origination volumes have declined, revenues have dropped, and expenses continue to rise,” says Walsh. “Lenders have started to shrink excess capacity by reducing staffing levels, exiting less profitable channels or exiting the business entirely.”
MBA estimates that a 25% to 30% decrease in mortgage industry employment from peak to trough will need to occur, given the decrease in production volume from the record levels in 2020 and 2021.
On the servicing side of the business, profits have rebounded in 2022. Mortgage servicers are benefitting from slower prepayments and low delinquencies that have helped boost mortgage servicing right (MSR) valuations.
“The national mortgage delinquency rate reached a record-low in the second quarter of 2022 but will likely increase with the uptick in unemployment and the destruction caused by Hurricane Ian in Florida, South Carolina and other nearby states,” Walsh continues.
Read the full Mortgage Finance Forecast and Economic Forecast here.
