Mortgage economists raise forecasts despite signs of a slowing market

Both the Mortgage Bankers Association and Fannie Mae have recently increased their mortgage volume forecasts for this year and next, despite signs that the pent-up demand from the delayed spring home buying season has started to wane.

"The housing market continues to thrive in the low-rate environment, particularly refinancing, but the sector is showing some early signs of slowing on the purchase side as the delayed seasonal effect works its way through the market,” Fannie Mae Chief Economist Doug Duncan said in a press release. He noted that while issues related to COVID-19 create some uncertainty, the pace of growth won't likely be hindered "to the level of a potential second recessionary downturn."

Fannie Mae predicts average rates for the 30-year fixed loan will remain at 2.8% through 2021 and only rise to 2.9% for 2022.

The MBA is more conservative, predicting the 30-year FRM will go from 2.9% in the current quarter to 3.3% one year from now and to 3.6% by the end of 2022. However, the MBA's chief economist, Mike Fratantoni, recently said he expects rates to go even higher if both Senate seats in Georgia flip to the Democrats after January's runoff election.

Fannie Mae's November forecast calls for $4.12 trillion in mortgage originations this year, up from $4.08 trillion in the October outlook. For 2021, the latest projections call for $2.72 trillion in volume, up from the $2.62 trillion that Duncan last predicted.

For 2022, Fannie Mae is making an initial projection of $2.47 trillion. Purchase volume will increase from $1.53 trillion this year, to just under $1.6 trillion in 2021 and $1.64 trillion in 2022.

Meanwhile, Fratantoni raised his projections for 2020 to $3.39 trillion from October's $3.18 trillion. Next year, he projects $2.56 trillion, compared with $2.49 trillion one month prior.

The forecasts for 2022 and 2023 were also raised to $2.2 trillion and $2.17 trillion, respectively.

While Fratantoni's total forecast remains conservative compared with Duncan's, he also boosted his prior prediction for record purchase activity over the next three years. The MBA expects 2020 to end with $1.42 trillion in purchase volume. That will increase to $1.59 trillion next year, then to $1.63 trillion in 2022 and $1.65 trillion in 2023.

Total home sales will increase 5.7% this year over 2019, to 6.37 million units on a seasonally adjusted annual rate basis, Fannie Mae said. That will be driven by a 21.5% increase in new-home sales. Existing-home sales will be up 3.6% on a year-over-year basis.

While total home sales are expected to increase by 0.8% next year, new-home sales will be up by 6.2% while existing-home sales should remain flat in Fannie Mae's forecast.

However, growth in the supply of new homes might be on the wane as well. While there was a 2.24% year-over-year increase in October in new single-family permit authorizations, that was down from September's gain over the prior 12 month period of 6.09%, according to the BuildFax Housing Health Report.

There was a 3.72% increase in October compared with September in authorizations.

"Housing activity remains strong in October spurred by historically low mortgage rates and strong demand," said BuildFax Managing Director Jonathan Kanarek in the report. "However, this trend may begin to slow — as seen with new construction this month. The recent announcement of a vaccine candidate against COVID-19 has shown conflicting signals within housing stocks. We're closely monitoring how the news could impact a potential reversal in mortgage rates and homebuilder trends."

For existing homes, maintenance volume increased 5.23% year-over-year in October while remodels — a subset of maintenance that includes renovations, additions, and alterations — had a 4.59% increase in volume, BuildFax said.