Everyone likes to see sales and profits go up, but for 2017 the mortgage industry is likely to face a marketplace erosion. The folks at the Federal Reserve are determined to raise interest rates, a path toward higher costs for lenders and borrowers, which will surely lead to fewer mortgage originations. Will the Fed cause a 2017 mortgage slowdown?
The problem is that it's not just mortgage rates. They have risen with great visibility and the picture gets worse when borrowers also take a look at home prices. According to NAR, March existing-home prices were 6.8 percent higher than a year earlier, the “61st consecutive month of year-over-year gains.”
“It's the combination of these slightly higher interest rates plus home prices that continue to rise at a rate that far outpaces wage growth which are beginning to cause affordability issues,” said Rick Sharga, executive vice president at , the online real estate marketplace. “That's likely to have an impact on loans issued to purchase a home. Lenders will have an even harder time selling refinance loans, where average interest rates have been below 5 percent since 2009, and most of the borrowers who could have benefited from refinancing their mortgages have already done so.”
And now the good news…
The goal is always more sales and better margins and with 1.6 million originations predicted this year the picture is hardly bleak, there is business out there. In fact, it's possible that with a few breaks things could get better.
First, at the start of the year many observers expected the Fed to raise rates three times in 2017 but such increases are not a certainty. The Fed's announced goal is to achieve 2 percent inflation, a rate designed to encourage consumer consumption because with an inflationary nudge the public is expected to buy more stuff now and not wait until prices are higher. This sounds good in a classroom but the reality is that consumer spending rose just .1% in February, half the expected increase.
If the Fed really does raise rates three times this year, and if each increase is for .25%, then counting the December increase we will see bank rates go up by a full percent within a year. That seems to be a lot, especially when we look at incomes.
Second, incomes have been stalled. The Census Bureau says real 2015 incomes were lower than in 1999. However a recent study by three noted economists – Thomas Piketty, Emmanuel Saez, and Gabriel Zucman – says real wages were actually frozen between 1980 and 2014 for half of all workers. The result is that affordability levels are stuck: a March survey from Attom Data Solutions shows that affordability is at its lowest level in eight years.
However, we may see some encouraging wage news if the stock market is correct (up substantially since November) and consumer confidence is on target (in March it was at the highest level since 2000). With better household incomes consumers will be more likely to spend and with more spending additional dollars will be spent on wages.
Third, refinancing declines may be less severe than expected. Higher prices mean more equity and with more equity fewer homes are underwater so old and costly loans that could not be refinanced may now get another look. Also, given increased public confidence and higher home values, we may see more people using home equity
to start a business, finance a college education, or otherwise get cash from their homes.
Lastly, mortgage rates may not rise in lockstep with bank rates because large and growing numbers of loans are now originated by nonbanks, a financing source not directly tied to the Fed. For example, the Fed raised bank rates in December 2015 but in the first half of 2016 mortgage rates largely fell – one reason, perhaps, we did not see additional Fed increases during the year and a reason to believe that 2017 may see less of an origination slowdown than expected.
So will the Fed cause a mortgage slowdown? It certainly can have an impact but there's also a good chance the answer will be no, that Fed actions will be less negative than expected especially if it does not engage in serial rate increases. It did one increase in 2015, one in 2016 and that could be a very acceptable strategy for 2017.
Will the Fed cause a 2017 mortgage slowdown?