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MBA: 2020 could absolutely see a recession

Refinance activity to plummet nearly 25%

A recession could be a real possibility in 2020, according to the Mortgage Bankers Association.

At the MBA Annual conference in Austin, MBA Chief Economist and Senior Vice President of research and industry technology Mike Fratantoni forecasted 2020 could possibly see a recession, even as soon as the first half of the year.

“We could absolutely get a recession in the first half of next year is what makes sense for when it would happen,” Fratantoni said at the conference.

But this could depend on the economy from other parts of the world. If Brexit gets to be a really clean resolution, that could put some upward pressure on rates, Fratantoni predicted. And Europe has really done some damage to its financial system by letting rates go negative.

“If we are going to get higher rates next year it’s going to be from better news than we’ve been anticipating from abroad,” he said.

He explained that previously the MBA was predicting 1% growth in 2020, but that has since been revised down to 0.9% growth for the year.

The Federal Reserve has already cut rates twice in 2019, with most experts expecting one more rate cut for the year. Fratantoni agreed 2019 will see one more rate hike, and then hold steady until the economy begins growing 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 fixed-rate mortgage rate to rise to around 4%.

Refinance activity will plummet in 2020, and purchase originations will increase only slightly. Refinance originations will plummet by 24.5% to $599 billion from 2019 to 2020. He also said purchase originations will increase by 1.6% to $1.29 trillion in 2020.

The MBA forecasted that for 2019, mortgage originations will come in at about $2.06 trillion, the highest since $2.31 trillion in 2007.

“Interest rates will, on average, remain lower for longer given the somewhat cloudy economic outlook. These lower rates will, in turn, support both purchase and refinance origination volume in 2020,” Fratantoni said. “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. Given the capacity constraints in the industry, some of this refinance activity will spill into the first half of next year.”

The drop in refinance activity will likely occur in the second half of 2020, Fratantoni forecasted.

“The industry continues to be challenged by elevated costs, and as we saw in 2018, the mortgage market is quite competitive. Revenues fall when lenders are chasing fewer loans,” said Fratantoni.

And while home price growth will continue in 2020, it will slow down from 2019. Frantantoni forecasted that we will see a further deceleration in the next few years as more housing supply comes into the market.

“Moderating price growth is healthy, as it allows household incomes to catch up with home values. This improvement in affordability will lead to more home sales – especially given the rise in household formation and growing demand from first-time homebuyers,” said Fratantoni.

“The health of the labor market plays a significant role in the outlook for housing,” he said. “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.”

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