The low mortgage rates that propelled the housing market throughout the COVID-19 pandemic will rise later in the year, but they’ll do so gradually, Freddie Mac said Thursday in its quarterly outlook. That will give more homeowners a final opportunity to refinance their mortgages.
The gradual rate climb has led Freddie’s economists to increase their projections on mortgage origination volume this year. In their estimation, 2021 will rival last year’s incredible performance of $4 trillion in origination volume.
Freddie Mac now forecasts total mortgage originations in 2021 to check in at $3.9 trillion in 2021, up from its forecast in April of $3.5 trillion. The government sponsored entity now expects total originations in 2022 to decline to $2.6 trillion.
The average 30-year fixed-rate mortgage is expected to be 3.1% in 2021 and up to 3.7% in 2022. In 2020, the 30-year FRM averaged 3.1%, said Sam Khater, Freddie Mac’s chief economist.
Home price growth is forecast to hit 12.1 % in 2021, before slowing to 5.3% in 2022. Growth was 11.3% in 2020.
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“Despite the housing market’s recent highs, there are indications of softening demand in recent home purchase mortgage applications data,” Khater said. “We expect refinance activity to soften as higher mortgage rates dampen activity.”
Freddie Mac’s economists believe that purchase originations will increase to $1.8 trillion in 2021 and $1.9 trillion in 2022, up from $1.5 trillion in 2020. Refinance originations are now forecast to reach $2.2 trillion this year, up from the April forecast of $1.8 trillion in refis.
Refi volume will fall as rates gradually tick up, Khater said, before dropping to an expected $713 billion in 2020. Refis had a banner year in 2020, with originations checking in at a record $2.6 trillion.
The latest employment report from the U.S. Labor Department showed while the U.S. economy added 850,000 nonfarm payroll jobs in June, it’s still down 6.8 million jobs from February 2020. Job openings, though, have surged to a record high of 9.2 million.
The single-family housing market remains robust, with U.S. house prices increasing 17% year over year in the May release of the Freddie Mac House Price Index (FMHPI) — the highest 12-month house price growth in the history of the FMHPI going back to 1975. It’s higher than the mid-2000s house price boom and higher than the inflation years of the late 1970s and early 1980s, Khater said.
“As the economy continues to mend, the housing market remains strong even as certain obstacles have begun to slow sales across the country,” Khater said. “Of note, high house price growth has been buoyed by increased demand due to low mortgage rates, disposable after-tax income that has risen during the current recession and a major shortage of housing supply relative to our population.”