Fannie Mae's senior economists said
today that anticipated declines in refinance
originations suggest that mortgage industry employment, which has trended up
since hitting bottom early next year will likely pull back in coming months.
This will be just one offshoot of the pain the housing industry is
beginning to feel as interest rates rise.
Writing in the company's September
Economic Forecast, Doug Duncan, Brian Hughes-Cromwick, and Mark Palim said that,
as early as its July meeting the Federal Open Market Committee (FOMC) expressed
concern that rate hikes could hurt housing.
Since then rates have continued to move even higher and they will
continue to drift upward for the next year with the yield on 30-year fixed-rate
mortgages (FRM) trending up to
approximately 5.3 percent by the end of next year. The early September rate of slightly over 4.5
percent is already about 120 basis points over the recent trough in early May.
said rising rates are already reflected in recent housing indicators with July single-family
housing starts trailing those in February by 5 percent. Existing home sales made a solid gain in July to the
strongest pace since late 2009 but this is a lagging indicator and pending home
sales, a leading one, fell moderately for a second month suggesting an upcoming
decrease in existing sales. . Purchase mortgage applications-another leading indicator of home sales-have declined roughly 15 percent from their
peak in early May. So far, the drop in
purchase mortgage applications has been much more severe
than that for
pending home sales, but given the level of cash-only purchases the relationship between mortgage applications
and home sales is less tight than it has
been in the past.
New home sales also plunged in July, the largest drop
since the homebuyer tax credit ended in 2010.
New home sales, like pending sales are based on contract signings and
are thus are a timelier indicator than existing home sales. Earlier months' data was also revised down in
July and revised down sharply.
Still home builders remain optimistic. The National Association of Home
Builders/Wells Fargo Housing Market Index rose for the fourth consecutive month
in August to a level last seen eight years ago.
Perhaps the drop in new home sales will be short lived, the economists
say, or perhaps builders will soon be changing their minds.
The higher rates do not yet seem to have affected home
prices. They continue to show solid
monthly gains although those have moderated since the first of the year. Limited
inventory has been responsible for much of what the authors call unsustainable home
price growth, however these conditions have been improving amid reduced demand
and they predict further moderation in home price gains in coming
affordability is still historically high, it is becoming an issue for some potential homebuyers, especially
first-timers. Between the spike in
interest rates, rising home prices, and anemic income growth many are no longer able to qualify a mortgage. The
affordability index for first-time homebuyers fell sharply
in the second quarter and will
likely post another sizable drop in the current
formation among young persons is being held back by the weak labor market,
tight lending standards, and student debt burdens. A recent Census Bureau report shows that the
share of post-college age individuals still living with their parents continued
to edge higher to 13.6 percent in 2012.
Lending standards have gradually eased
over the last years and the economists expect that gradual trend to continue,
especially after the revision of the new Qualified Residential Mortgage (QRM)
rule which eliminates the earlier high down payment requirements.
The three economists conclude that,
while the spike in interest rates has dampened a number of indicators of
housing recovery such as consumer sentiment and mortgage applications, the
recovery will still continue in a solid and sustained manner. Both new and existing home sales have experienced strong year-to-date gains
through the end of July, rising 22 percent
and 12 percent, respectively,
from last year's levels and are
forecast to rise further through the end of the year although at a slower
pace. Fannie Mae downgraded its 2013 projections
for new home sales from 481,000 to 440,000 but has held to its earlier forecast
for an 8.5 percent gain in existing
Hughes-Cromwick, and Palim also say that, given the 60 percent decline in
refinancing applications since early May they believe the refinancing boom has
peaked and that mortgage activity is now shifting to purchase activity. However their predictions for mortgage
activity are largely unchanged at a total for 2013 of about $1.75 trillion,
down 14 percent from 2012. Refinancing
will drop to a 64 percent share from 73 percent for the entire year but by the
fourth quarter purchase originations will have more than a 50 percent
share. Adjustable-rate mortgages are expected
to increase in popularity as fixed rates rise.
Finally Fannie Mae's
economists expect the deleveraging in mortgage debt to end soon. Total single-family mortgage debt is forecast
to rise modestly in 2013 after five straight years of annual drops.