We may be two weeks into 2015, but that doesn’t mean we’re out of the range of predictions for the year. Analysts from Fitch Ratings weighed in with their predictions for 2015 in their Global Housing and Mortgage Outlook, and there’s good news and bad news.
On the good side, affordability shouldn’t be affected greatly by a projected increase in interest rates, because, according to Fitch’s analysts, the interest rate hike is going to be moderate.
But on the other hand, mortgage volume is projected to fall in 2015, as refinances will fall as interest rates rise, and slow wage growth and slow household formation rates continue to drag down mortgage production.
Here are six predications for housing in 2015 from Fitch’s analysts:
1. Home price growth will slow
Fitch’s analysts write that after annualized home price growth of 10% from January 2012 to January 2014, market momentum has stalled out, with home prices growing at an annualized rate of 2.4% in 2014, which is less than the rate of inflation.
And don’t expect things to suddenly improve. In fact, the analysts say that home price growth is going to slow even more in 2015.
“In general, Fitch views home prices nationally to be sustainably valued, and does not expect significant growth in prices in 2015," the analysts say. “Fitch projects that prices will grow at approximately 1.5%, in line with inflation, with the potential for upside stemming from a continuing economic recovery, and downside from an expected increase in interest rates. Restrictive mortgage guidelines may also limit the amount of credit available for borrowers returning to the market.”
2. Interest rates WILL rise in 2015, but it won’t be as bad as you think
Now that the Federal Reserve has ended its more than two-year-old asset purchase program due to an improving economic outlook, industry observers expect interest rates to rise at some point this year.
The Fitch analysts are no different, but they say the increase will only be modest.
“Driven by central bank policy, Fitch expects that mortgage rates will increase approximately 50 basis points by the end of 2015,” the analysts said. “With this modest increase, Fitch expects a muted impact on the market at large. Current mortgagors are unlikely to see significant stress from small rate increases, though rising mortgage costs may discourage new buyers from entering the market, dampening demand.”
3. Rising rates will cause a decline in mortgage volume
Fitch’s analysts predict that new lending volume will decline by 10% in 2015, with high prices and rising interest rates weighing on a recovering market. And with rates still at near-record lows, most able borrowers either have or are now refinancing, making refinances a smaller slice of originations moving forward, Fitch’s analysts said.
“Borrowers who have found access to credit difficult in the recent tight underwriting environment may see opportunities in 2015, but lenders remain cautious, and this is unlikely to give a significant boost to the overall market volumes,” the analysts said.
“Furthermore, wage growth remains stagnant, and household formation rates, while improving over the last year, remain very low by historic standards,” the analysts added. “Fitch expects that lending volumes will remain relatively low, and any volume added from greater credit availability will be counterbalanced by the effects of high prices and rising rates. Origination volumes are likely to remain low for several years as the market works to find a new equilibrium of demand, lending standards, and home availability.”
4. Delinquency rates will improve
According to Fitch’s analysts, delinquency rates on legacy loans have been falling steadily over the last two years, due to significant home price growth. But with home price growth set to slow, any potential further performance improvement is highly dependent on a continuing economic recovery.
“Fitch expects the economic recovery to continue, though with some concerns over the broadness of the recovery,” the analysts said. “Median household income has been slow to recover since a bottoming out in 2011, and remains 7% below pre-recession values in real terms. Yet, unemployment trends are positive, and GDP growth has rebounded to more healthy rates. Fitch projects that delinquency rates on legacy collateral will fall by 30bp in 2015. For loans originated post-2010, performance has been exceptional, and Fitch expects this trend to continue.”
5. Prepayments will slow down
When mortgage rates hit all-time lows in 2012, large numbers of borrowers refinanced into products designed to lock in low rates, elevating prepayment rates, the analysts said.
“Now, with rates expected to rise in 2015 and beyond, prepayments are expected to be low for the foreseeable future, dropping from an average of 13% in 2014 to 10% in 2015,” the analysts said.
“Fitch expects low prepayment rates to be the market’s new normal for the next several years until the mortgage landscape changes more significantly, though should prices keep growing, refinance volume will grow for underwater borrowers who return to positive equity.”
6. The rate of homeownership will remain low, permanently
When loose lending standards and an “exuberant” market encouraged the use of homes as an investment, home ownership rates peaked at 69% in 2006, the analysts said.
Since then, home ownership rates have fallen to below 65%, and will likely continue to trend downward.
“This change is driven by two main groups: those that lost their homes when home prices fell, and those that remain hesitant to embark on a path of home ownership after having witnessed the market stresses of the last decade,” the analysts said.
“As the economy continues to recover, ownership rates are likely to stabilize, but Fitch expects that home ownership rates will not recover to their mid-2000s market peaks, with a higher proportion of able or marginal buyers opting to rent over the next several years.”