We expect that the US economy will be essentially treading water over the next year, with the unemployment rate little changed, and only modest growth in economic output.  Such an environment will not provide much support for the housing market, which will also continue its tepid recovery.  Construction activity remains extremely weak, although housing starts and completions were up in September, heavily driven by an increase in multifamily starts. Purchase applications and existing home sales showed some gains but new home sales remain close to all time lows.

Although rates will remain low by historical standards, they will be trending upwards, and this will lead to a significant reduction in refinance volumes. The pool of eligible borrowers who can refinance is small, and those for whom a refinance is beneficial, have already refinanced or mostly likely will in the near future. This downward trend in refinances will cause a decline in total originations next year. We expect total originations in 2010 to be $1.4 trillion, a decline of 30 percent from 2009’s level, with a 28 percent decrease in purchase originations to $480 billion and a 31 percent decrease in refinance originations to $921 billion. The expected level of purchase originations in 2010 will be the lowest since 1992. With an increase in home sales and stabilization of home prices, and fewer cash purchases in 2011, we expect purchase originations to rise 30 percent. As rates increase and fewer candidates for refinance remain, refinance originations in 2011 will fall 60 percent to $370 billion, which would be the lowest level of refinance originations since 2000. This would bring total originations in 2011 to $996 trillion, a 29 percent drop from 2010, and the lowest level of total originations since 1997. 

Housing and Mortgage Data Update

• Total housing starts increased 0.3 percent in September to a seasonally adjusted annual rate of 610,000 from an upwardly revised August estimate of 608,000 (previously reported as 598,000). This is 4.1 percent higher than in September 2009. Total housing starts are at their highest since April. Single family housing starts increased 4.4 percent to 452,000 starts from 433,000 starts in August, which was previously reported as 438,000. This was 10.8 percent lower than the same month a year ago. This is the highest that single family starts has been since May this year. Starts on 5+ units decreased 6.8 percent to 150,000 units from 161,000 units in August. This was still 114.3 percent higher than a year ago.
• Total completions increased 7.3 percent in September to a pace of 648,000 units from 604,000 units in August. This was 10.1 percent lower than a year ago. Both single family and 5+ unit categories saw increases with single family completions increasing 4.8 percent to 501,000 units and 5+ unit completions increasing 16.0 percent to 138,000 units.   
• Total existing home sales in September increased 10 percent to a seasonally adjusted annual rate of 4.53 million units. The August sales were revised downward slightly to 4.12 million units from 4.13 million units as previously reported. On a year over year basis, September’s sales are down 19.1 percent. This was the second consecutive month in which existing home sales increased and the sales pace is the highest since June. Both single family and condo and co-op home sales saw increases in September. Single family sales increased 10.0 percent to 3.97 million units in September from 3.61 million units in August. This is 19.5 percent below September 2009. Condo and co-op sales increased 9.8 percent 560,000 units in September from 510,000 in August, and are 16.2 percent lower than the same month one year ago.

• Total housing inventory in September decreased 1.9 percent to 4.04 million existing homes for sale, a 10.7 months’ supply at the current sales pace. This is down from a 12.0 months’ supply in August.

• Sales of newly constructed homes remained unchanged at a seasonally adjusted annual rate of 288,000 homes in August. July’s sales pace was initially reported at 276,000 but was revised upwards to 288,000 units. The August sales pace was 28.9 percent lower than in August 2009. The 288,000 unit sales pace remains close to the all time low in the series of 282,000 units that was seen in May 2010.

• According to MBA’s Weekly Application Survey, 30-year fixed mortgage rates averaged 4.45 percent in September, a nine basis point decline from the prior month and fifth consecutive monthly decrease.    

• On a seasonally adjusted basis, purchase applications increased by 5.2 percent in September after a 1.6 percent increase in August, albeit from very low levels. These two increases followed three straight monthly declines.  Refinance applications decreased by 3.9 percent relative to the prior month, ending a string of four consecutive monthly increases.

• We expect that mortgage originations will decrease to $1.4 trillion in 2010 from a downwardly revised $2.0 trillion in 2009, previously estimated at $2.1 trillion. Total originations will then fall to $996 billion in 2011, the lowest level of originations since 1997. Purchase activity in 2010 will see a significant drop from 2009, although it was given a brief boost in the spring by the tax credit program, but start to recover in 2011. Refinance activity is currently being buoyed by mortgage rates that remain close to historical lows, but will fall in 2011 and 2012 as rates start to increase. Purchase originations will fall to $480 billion from $665 billion in 2009 and refinance originations will decrease to about $921 billion in 2010 from $1.3 trillion in 2009. We expect that the refinance share of originations should fall from 66 percent in 2010 to 37 percent in 2011, and then 26 percent in 2012.

© 2010 Mortgage Bankers Association

MBA Mortgage Finance and Economic Commentaries - each month MBA Research provides commentary on the current mortgage finance and economic climates. For more information, please contact MBAResearch@mortgagebankers.org.