There was good news and bad news from the Mortgage Bankers Association (MBA) as it made 2016 economic predictions to its members gathered in San Diego for MBA's 102nd annual convention.  First the good news.  MBA sees purchase mortgage originations rising by 10 percent over 2015 to a total of $905 billion. Purchase originations had jumped from $759 billion in 2014 to an anticipated $821 billion this year.

However, (here's the bad news) that gain will be offset, although certainly not unexpectedly, by a drop of one-third in refinancing. The Association expects refinancing volume next year be $415 billion, down from a projected $630 billion this year. 

The total of mortgage originations will therefore decline from an expected $1.45 trillion in 2015 to $1.32 trillion in 2016.  Further it will remain flat in 2017, dipping about $1 billion over all compared to 2016.  Even as purchase mortgages increase again to $978 billion the gain will be wiped out by a further decline in refinancing to $331 billion.

"We are projecting that home purchase originations will increase in 2016 as the US housing market continues on its path towards more typical levels of turnover based on steadily rising demand and improvements in the supply of homes for sale and under construction." Michael Fratantoni, MBA's Chief Economist and Senior Vice President for Research and Industry Technology said.  "Despite bumps in the road from energy and export sectors, the job market is near full employment, with other measures of employment under-utilization continuing to improve. We are forecasting that strong household formation, improving wages and a more liquid housing market will drive home sales and purchase originations in the coming years."

Fratantoni said he projected overall economic growth at 2.3 percent in 2016 and 2017 and 2 percent over the longer term.  This will be driven mainly by consumer spending especially for durable goods, such as cars and appliances.  "The housing sector will contribute more to the economy than it has in recent years," he added.  "We are forecasting a 17 percent increase in single family starts in 2016 and a further increase of 15 percent in 2017.  Weaker growth abroad will mean fewer US exports, which will be a drag on growth over the next couple of years.  Recurring flights to quality, a demand for safe assets from investors abroad, will keep longer-term rates lower than the domestic growth environment would warrant."

He said he still expected that the Federal Reserve will begin to slowly raise short-term rates at the end of this year and that at some point thereafter will begin to allow their holdings of MBS and Treasury securities to run off.  Even after these actions, he projects the 10-Year Treasury rate will stay below 3 percent through the end of 2016, and 30-year mortgage rates will stay below 5 percent. 

"We forecast that monthly job growth will average 150,000 per month in 2016, down from about 200,000 per month in 2015, and that the unemployment rate will decrease to 4.8 percent by the end of 2016, returning to 5.0 percent in 2017 and 2018. The slight rebound will be driven by an increase in labor force participation rates to more typical levels," Fratantoni said, adding that "Refinance activity will continue to decline as there are few remaining households that can benefit from an interest rate reduction and because rates will gradually begin to rise from historic lows in the coming years.  Home equity products may see an increase in demand as home prices continue to increase at a decelerating rate."

MBA also upwardly revised its estimate of originations for 2014 to $1.26 trillion from $1.12 trillion.  The adjustment reflects the most recent data reported in the 2014 Home Mortgage Disclosure Act (HMDA) data release.