Due to low mortgage rates and a subsequent surge in refinances, mortgage origination volume is expected to reach $2.06 trillion this year, the best since 2007, according to the Mortgage Bankers Association’s most recent economic forecast.
However, total origination volume is forecast to decrease to around $1.89 trillion in 2020 and to around $1.74 trillion in 2021.
Purchase volume is forecast to increase 1.6% to $1.29 trillion in 2020, however, refinance volume is expected to fall by 24.5% to $599 billion, according to the report.
Mike Fratantoni, chief economist and senior vice president for research and industry technology for the MBA, says geopolitical uncertainty and a slowdown in the global economy combined to be the driving force behind this year’s increased financial market volatility and drop in interest rates.
Fratantoni says he expects these headwinds to continue, which will lead to slower economic growth in the U.S. next year.
“Interest rates will, on average, remain lower for longer given the somewhat cloudy economic outlook,” Fratantoni says in a statement. “These lower rates will in turn support both purchase and refinance origination volume in 2020.
“Lower-than-expected mortgage rates gave the refinance market a significant boost this year, resulting in it being the strongest year of volume since 2016,” Fratantoni says. “Given the capacity constraints in the industry, some of this refinance activity will spill into the first half of next year.”
After multiple years of home-price growth far outpacing wage gains, several markets in 2019 saw a slight slowdown in price appreciation.
Fratantoni says he expects to see further deceleration of home price appreciation in the next few years, as additional housing supply comes on the market.
“Moderating price growth is healthy, as it allows household incomes to catch up with home values,” he says. “This improvement in affordability will lead to more home sales – especially given the rise in household formation and growing demand from first-time homebuyers.”
For the mortgage industry, Fratantoni believes that if refinance volume does wane, as he expects in the second half of 2020, the margin pressures many mortgage companies faced in 2018 may reappear.
“The industry continues to be challenged by elevated costs, and as we saw in 2018, the mortgage market is quite competitive,” he says. “Revenues fall when lenders are chasing fewer loans.”
On the monetary policy front, Fratantoni expects the Federal Reserve will cut rates one more time before the end of the year, and then hold at that level until the economy resumes growth at a faster pace.
He anticipates that the 10-year Treasury rate will increase gradually to around 1.9% next year, which will cause the 30-year to rise to around 4%.
“The health of the labor market plays a significant role in the outlook for housing,” Fratantoni says. “Although job growth is expected to slow, along with the economy, overall market conditions look decent next year. Low mortgage rates and millennial buyer demand will be the primary reasons for a slight increase in purchase activity in 2020.”
The MBA forecasts that existing-home sales will reach an annual pace of 5.415 million in 2019, however, that is anticipated to increase to 5.556 million in 2020 and to 5.699 million in 2021.
Housing starts are forecast to reach an annual pace of 1.263 million in 2019, then increase to 1.301 million in 2020 and to 1.339 million in 2021.
The refinance share of total mortgage origination volume is expected to average around 38% in 2019, but fall to 32% in 2020, and to 25% in 2021.