By Ray Birch
IRVINE, Calif.—Look for mortgage rates to rise next year, possibly enough to dramatically slow the heavy refi business seen during 2020, one analyst is predicting.
Michael Fratantoni, chief economist for the Mortgage Bankers Association, shared his outlook for the mortgage market in 2021 and reviewed what has been a surprisingly strong year for mortgages in 2020, one of the lone/loan bright spots in the pandemic-driven recession, during a recent Origence Economic and Mortgage Market Outlook webinar.
“Our expectation is the Fed will keep rates stable at the short end of curve all through 2022, and then hike rates twice in 2023,” he predicted.
Turning back to longer-term rates, Fratantoni further predicted the 10-year Treasury will increase to 1.4% by the end of 2021. Mortgage rates, meanwhile, which for the 13th time in 2020 recently hit another “record low,” will tick up to 3.3% by the end of 2021 on the 30-year, he said.
“What does this mean in terms of mortgage volume? As you know, 2020 will be a year for the ages,” said Fratantoni. “We think we will end up with about $3.4-trillion in total volume, the second-highest total ever—$2 trillion in refi’s and a very strong purchase market at $1.4 trillion.”
Decline in Refi’s?
Fratantoni expects that if rates tick up by a half percentage point in 2021 there will be a “severe” drop in refinancing volume next year.
“We do think there will be refi business spillover into 2021,” he said. “However, the second half of 2021 could be reminiscent of 2018, with rates rising and refi’s falling off.”
Fratantoni acknowledged the purchase market has been one of biggest surprises of the year.
“Early this year we saw purchase volume 5% to 10% ahead 2019, and then the pandemic hit,” he pointed out. “At our worst point purchase volume was 35% below 2019. But as the country reopened in May the purchase market came roaring back. For much of the summer and fall it’s been 20% to 25% ahead of 2019’s pace.”
One Obstacle
While the purchase market rebound has been robust, it could have posted even stronger numbers were it not for one limitation, said Fratantoni.
“One of the biggest obstacles this year to purchase market growth has been lack of inventory,” explained Fratantoni. “And this is not due to a lack of builders, who are building at a pace 30% ahead of last year. Housing truly has been a V-shaped recovery.”
Fratantoni said new homes are “flying off the shelves” at the fastest pace since 2005.
“The challenging news: we only have a 3.5-month supply of new homes and a 2.5-month supply of existing homes,” he said. “At some point we will run out of homes for people to buy, and that will impact transaction volume.”
Fratantoni pointed to other challenges ahead.
“We have seen credit tighten,” he said. “We are back to 2014 levels of credit criteria. If I rely during the next couple years on a large set of first-time homebuyers, that will be more challenging with credit this tight. With that, on top of the lack of inventory, at the entry-level home market level there won’t be a great deal of opportunity.”
Rethinking Underwriting
With Fratantoni forecasting home sales volume will decline next year, he thinks lenders will adjust their current, very conservative underwriting positions.
“I believe credit will loosen. We need a greater availability of low-down-payment loans to support first-time buyers,” said Fratantoni, noting lenders will never get back to the lightly documented “ninja” loans that sparked the mortgage crisis more than ten years ago.
Michael Fratantoni
Fratantoni’s outlook follows a CUToday.info report in which a number of mortgage analysts predicted mortgage rates will begin to rise in 2021, due in part to economic optimism driven by a COVID-19 vaccine.
“The excellent news about the COVID-19 gives optimism toward economic normalcy. Rates are headed higher this week,” said Jeff Lazerson, president at MortgageGrader.