The Mortgage Bankers Association (MBA) last week upped its 2004 forecast for loan originations to $2.5 trillion from $2 trillion previously. The MBA attributed the increase to continued low interest rates. The historical low rates are expected to result in a record high loan origination market for purchase loans and a refinance market that is surprisingly strong even compared to the record set last year.
MBA predicts that purchase home mortgages will comprise 54% of total originations, which is equivalent to $1.4 trillion. These numbers are up from the $1.3 trillion previously forecast. Refinancings are expected to comprise $1.1 trillion in originations, which is significantly more than the $0.7 trillion originally expected.
In MBA's new forecast, refinancings comprise 46% of originations this year. For perspective, the only two years that refinancings made up a higher percentage of originations were 2003 (66%) and 2002 (62%).
The updated forecast is mainly based on MBA's latest outlook on interest rates. The MBA currently projects the 10-year Treasury rate will average only 3.9% in 2Q04 and 4.1% in 3Q04. For 2004, the MBA predicts the 10-year yield to average 4.10% compared with 4.0% in 2003.The association expects that by the fourth quarter, the Fed will position itself to raise interest rates, though the earliest by December.
As for mortgage rates, MBA expects the average 30-year fixed rate to drop to 5.4% in the second quarter of 2004 and then rise slowly. For the year, economists are forecasting an average of 5.6% for the 30-year fixed-rate mortgage rate versus 5.8% in 2003. Refinancing activity is expected to be slower this year compared to 2003 despite the still very low rates seen this year.
The MBA predicts that year-over-year real gross domestic product will be at 4.6%, from 3.1% in 2003. The increase is attributed to three factors: an increase in personal consumption to 3.5% in 2004 from 3.1% in 2003 and a 12.1% rise in business fixed investment, as well as inventory building that is expected to spur the job market.
While the rebound in the economy has been strong, rates have remained low for several reasons, Doug Duncan, chief economist at the MBA, stated publicly. He outlined the reasons: productivity gains and the effect of imports have held down inflation; rising corporate profits lessened the need to fund new business expansion through debt; and the job recovery hasn't been strong enough to drive up rates. Because of these factors, investors - who previously believed the significant spread between short-term and long-term rates would narrow - are now expecting a decline in long-term rates instead. MBA has been anticipating that the Fed would wait until late this year before raising short-term interest rates, Duncan said.
Meanwhile, the MBA is also projecting housing starts to reach 1.83 million this year, which would be a marginal decrease from 1.85 million in 2003. Existing home sales are predicted to total 5.8 million compared with 6.1 million last year, and new home sales are projected to total 1.05 million in contrast with 2003's 1.09 million.
According to Duncan, a major factor in these numbers is housing affordability, specifically in light of the unexpectedly strong house price appreciation seen in the fourth quarter of 2003. Though housing fundamentals are expected to remain strong generally across the U.S., there are expected to be certain regions, such as along the West Coast, where affordability will not be able to keep up with rising house prices.