The rapid drop in mortgage interest rates in the last few weeks caused the Mortgage Bankers Association to revise its origination forecasts for 2015 and 2016, especially when it comes to refinancings.
However, the drop in rates will have little effect on fourth-quarter 2014 volumes because the majority of loans entering the application stage now won't be funded until 2015, explained Mike Fratantoni, the group's chief economist, speaking at its annual convention in Las Vegas.
In each of the next two years, the MBA is expecting approximately $1.2 trillion in origination volume, a 7% increase over 2014's $1.1 trillion.
The 2014 projection is up from $1 trillion. The MBA revised its 2013 origination result up to $1.85 trillion from $1.76 trillion after looking at the Home Mortgage Disclosure Act data.
Purchase volume next year will be up 15%, to $731 billion while refi volume will fall to $471 billion. In 2016, purchases will be up to $791 billion and refis down to $379 billion.
But the events of the last two weeks have led the MBA to increase its projections of refi originations for 2015 to the tune of $50 billion more than previously expected, and for 2016, Fratantoni said. It once believed rates would be above 5% early next year.
The latest forecast has rates at 5% by the end of 2015 and to 5.4% by the end of 2016.
"With the recent drop in mortgage rates, some borrowers now have an incentive to refinance and with the home price gains of the last two years more homeowners have enough equity to refinance, so we expect a pickup in refinance application activity over the next few months, which will lead to higher refinance originations in early 2015," Fratantoni said.
The four main global issues that have affected rates in recent weeks — Russia, the Middle East, Ebola and weak economic growth in Europe — could continue to affect rates in the early part of next year, keeping the 10-year Treasury yield under 3%.
Growth in the purchase market will be driven by a stronger U.S. economy coupled with growth in American's income. This increase in income will be driven by the highest number of job openings in the past decade, he said.
The resulting shortage of workers will lead to higher incomes. That in turn could bring back many people who have left the labor market and are no longer counted in the unemployment statistics.
A good sign for the market is the growth in single adults who do not live alone — that is they live with a roommate. While for now they believe they can't afford to live alone, these are typically unstable relationships.
So it is likely to lead to an increase in household formations, Fratantoni said.
Another trend that is likely to benefit homeownership is that the availability of rental properties continues to decrease, thereby driving rents higher, he said.
However, student loan debt could be an overhang on the market, he said. The cumulative amount has grown to over $1 trillion and it could have a significant effect on people's ability to qualify for a mortgage.
Also hurting the home buying market is that people are making the decision to purchase their first home at a later period in their lives than they have previously.
Loan pricing is also an issue as costs have been driven up by increased guarantee fees and loan level pricing adjustments for conforming loans, while Federal Housing Administration-insured loans have seen increases in the mortgage insurance premium from the Department of Housing and Urban Development, Fratantoni said.