Freddie Mac: Mortgage market soaring in 2016, will fall back in 2017

Ben Lane

Time to get while the getting’s good

Freddie Mac continues to believe that mortgage lending is on track for a big year this year, but now expects the market to tap the brakes in 2017.

Last month, Freddie Mac’s monthly outlook report showed the government-sponsored enterprises’ analysts were continuing to project that mortgage originations will top $2 trillion this year, which would be the first time originations have been that high since 2012.

Freddie Mac’s latest report reiterates that belief, but now the GSE is expecting originations to fall back in 2017, from $2 trillion this year to $1.65 trillion next year.

But it won’t be purchase mortgage originations that will drag down 2017’s origination total, as purchase and home improvement mortgage activity is actually expected to rise next year.

According to the Freddie Mac report, next year’s drop will be driven by a significant decline in refinances.

Freddie Mac’s current forecast shows that the GSE expects to see $1 trillion in refinance mortgage originations in 2016, but projects that 2017 refinance volume will fall about 41% to just under $600 billion.

The reason for the decline? Interest rates, which Freddie Mac expects interest rates to rise slightly throughout next year, albeit not by much. And as Freddie Mac notes, refinance activity is “rate sensitive,” so any upward movement in rates will likely calm mortgage refinance activity.

“Even if worldwide bond yields recover to the pre-Brexit status quo, mortgage interest rates are likely to remain low for an extended period,” Freddie Mac notes. “Expect a gradual rise in rates throughout the remainder of 2016 and into 2017, with the 30-year fixed-rate mortgage averaging 3.9% in the fourth quarter of 2017.”

Freddie Mac’s report shows that the GSE’s analysts are not expecting much of an increase in total home sales going forward, with a slight decline in seasonally adjusted sales in the fourth quarter.

Freddie Mac projects that next year, new home sales will rise, driven by increases in new single-family housing construction that will push total home sales slightly higher, to 6.16 million in 2017 compared to 6.04 million in 2016.

Additionally, forecasting house prices will grow at a 5.6% annual rate in 2016, moderating to 4.7% in 2017, Freddie Mac’s report shows.

“The economy and labor markets are looking better. We’re even seeing modest wage gains,” Freddie Mac’s chief economist, Sean Becketti, said.

“And Fed watchers are increasingly predicting a December rate hike as things improve. However, worldwide economic growth is weak and its prospects have gotten worse. This may all sound familiar because we’ve been here before… last year,” Becketti said.

“As the economy sputters along a little bit faster than stall speed, the U.S. housing market continues to be a bright spot, though there’s less room to run than in the prior few years,” Becketti concluded. “Unlike new home sales, existing home sales have nearly recovered back to prerecession norms. Regardless, we see new home sales improving some next year driven by increases in new single-family housing construction which will push total home sales slightly higher.”

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A Manhattan Beach resident since 1976, Mike Dunitz has 30 years of experience as a real estate broker in the Beach Cities. Mike is known for his integrity, negotiating skills, and for delivering exceptional personal service.

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