Purchase market is poised to topple refi’s reign in 2021

"I think the operative word right now is we're in a period of transition."

While 2021 likely won’t approach the record breaking tizzy of 2020, the housing market will continue to flourish on the strength of the purchase market, according to economists at the Mortgage Bankers Association.

After last year’s record $3.83 trillion in mortgage originations, the MBA forecasts volume to fall 14% this year to $3.28 trillion, which would still be the third-highest total on record. The share of refinances in mortgage origination volume dipped below 50% for the first time in 15 months in March, according to Black Knight‘s latest monthly data report, and economists say this is just the beginning.

At the trade organization’s spring conference on Wednesday, the MBA’s trio of economists noted that mortgage rates are expected to continue rising to around 3.7%, contributing to a further slowdown in refinance demand. However, where refis falter, purchases pick up steam.

Mortgage rates are still lower than they were a year ago, MBA chief economist Mike Fratantoni said, and while they will likely get high enough to create a flip in the amount of borrowers refinancing versus purchasing, they won’t reach a peak that would be harmful to purchase originations.

The MBA expects the Federal Reserve to uphold its word and keep short term interest rates effectively at zero all the way through 2022, followed by a number of hikes in 2023. Overall, Fed purchases helped to drive mortgage rates and other loan interest rates to the lowest level on record by boosting competition for bonds, which compresses yields.

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During the financial disruption that occurred in March and April of last year, the spread between the 30-year mortgage rate and the 10-year treasury yield – which is normally around 180 points – jumped up to 260 or more, and continued to stay extraordinarily wide for the rest of the year. However, as mortgage rates have climbed nearly 40 basis points in the last two months, the spread has begun to shrink to about 150 basis points or even lower in recent weeks

With all this movement, the MBA expects to see much tighter margins and much lower revenues in 2021’s Q1 and Q2 data. According to Joel Kan, the MBA’s associate vice president of economic and industry forecasting, signs of volatility popped up when the Fed hinted at tapering asset purchases.

“I think the operative word right now is we’re in a period of transition,” Fratantoni noted.

What’s spurred the economic bounce back? According to the MBA, people purchasing homes with larger loan balances. Borrowers who wanted bigger and more expensive homes overtook the greater share of homes being sold. Homes with lower balances, typically $300,000 or less, struggled to keep pace due to extreme inventory shortages.

Moving into 2021, Kan still expects solid growth in overall purchase market, but there will undoubtedly be differences in which price tiers excel the most. However, the mere two month supply currently sitting on the purchase market may have a hand in price appreciation for all tiers regardless.

“In some cases and some geographies we are looking at prices topping records from the mid-2000’s,” Kan said. “The aggregated home price growth on a year-over-year basis was 11%, and by January, 12%. But we expect that to moderate. Our home price forecast is still a 10% pace, so down a little bit but with new home sales coming in at over a 1.2 million pace, that’s going to free up existing homes.”

But borrowers have money burning a hole in their pocket, and economists expect them to spend it. Pre-pandemic saving rates were between 5% and 7%. By the end of 2020, they were in the double digits – closer to 13% and 20%.

“If you look at deposits in the banking system, especially in February of last year, there was about $1.6 trillion in direct deposits,” Fratantoni said. “February of 2021, that had grown to $3.7 trillion. So more than $2 trillion gained effectively in cash assets that people are ready to spend as soon as things open.”

According to the MBA, the American Rescue Plan and vaccine rollout will continue to provide a lift to the economy, households, and businesses through the summer. Fratantoni said he expects economic growth to jump to 6.5% this year, a vast improvement from the pandemic-induced contraction of 2.4% in 2020.

All that to say, the MBA does expect inflation to be running somewhat higher that it has been for several years as the economy turns a corner and picks up speed.

“The economy will continue to recover, with rapid job growth, particularly in the hardest-hit, service sectors of the economy,” said Fratantoni. “The job growth is certainly positive, but this environment sets the stage for higher mortgage rates and faster inflation. However, if housing inventory levels improve and help to keep affordability in check, home sales should remain strong into 2022.”

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