MBA Forecast Commentary
Lynn Fisher, Mike Fratantoni, Joel Kan
Fed Holds but Rate Increase in June Expected
MBA Economic and Mortgage Finance Commentary: May 16, 2017
One of the main developments over the past month was that the Federal Open Market Committee
(FOMC) decided to leave short term rates unchanged today following their May meeting. The statement
characterized job growth and consumption as “solid” but noted that their preferred measure of core
inflation continues to run a bit below their 2 percent objective.
MBA continues to forecast that the FOMC will raise rates at its meeting in June and again in September.
It also remains likely that the committee will begin allowing assets to run off their balance sheet by the
end of the year which may exert upward pressure on mortgage interest rates. For the time being, the
FOMC confirmed today that it will continue reinvesting principal so as to maintain current balance sheet
levels. Given the size of the Fed’s holdings and current market conditions, balance sheet runoff could
have an even larger impact on mortgage markets than changes in their short-term rate target, bringing
additional volatility to an already choppy rate environment.
According to the BLS, 211,000 jobs were created in the US in April. This brought the year to date
average monthly employment growth to 185,000 jobs, on par with the average in 2016, and lowered the
unemployment rate to 4.4 percent, the lowest unemployment rate seen since 2007. We have seen job
growth at over 200,000 jobs in three of the four months in 2017 thus far, with the exception of a weak
March employment reading. In a separate report from the BLS, job openings continue to exceed hiring
and voluntary quits increased slightly. These are signs that the US economy is already below or at full
employment, and we expect that the unemployment rate will decrease to and settle at 4.3 percent for
2017 and 2018.
1
Average Monthly Payroll Growth
400
300
Thousands of jobs
200
284
235
254 265
250
210
170
163
174
174
96
100
88
179 192
226
216 232
187
211
79
10
(100)
(200)
(42)
(144)
(300)
(297)
(400)
(422)
(500)
Source: BLS
First quarter GDP was lower than expected, with annualized growth of just 0.7 percent. This was a
decrease from the 2.1 percent growth rate observed in the fourth quarter of 2016.First quarter GDP
numbers have been unreliable during the recovery, perhaps due to changing seasonality patterns.
Personal consumption expenditures, typically a major driver of US growth, decelerated significantly in
the first quarter, particularly in durable goods, but we expect that the overall weakness will dissipate in
the second quarter and beyond. One upside surprise was a 22.1 percent increase in nonresidential
structures investment, the largest quarter since the first quarter of 2014. Our forecast is for second
quarter growth to bounce back to 3.6 percent, and to still reach an average of 2.1 percent growth in
2017.
We estimate that total originations will be around $1.6 trillion in 2017, driven by over $1 trillion in
purchase volume, and a little over $500 billion in refinance volume. We expect that growth in the
purchase market will be driven increasing household formation and housing demand, given the
economic and job market health we have seen of late. Housing inventory remains tight, but if the
appetite for housing continues to grow along with home prices, we expect that more homes will be put
up for sale or built in response. Domestic economic fundamentals will continue to push rates higher, but
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there will be significant volatility and downward pressure from global and domestic geopolitical
uncertainty, along with lingering concerns over certain foreign financial markets. Our forecast is for
mortgage rates to average 4.3 percent in 2017 before increasing to 5 percent in 2018. The increase in
rates will continue to depress refinance business as borrowers lose the incentive to refinance or have
already refinanced into lower rates, and we have already seen the refinance share of applications fall to
the lowest level since 2008 in our most recent applications data.
Existing Home Sales, Inventory and Months Supply
12
8,000
7,000
10
6,000
8
5,000
6
4,000
3,000
4
2,000
2
1,000
-
Jan 1999
Aug 1999
Mar 2000
Oct 2000
May 2001
Dec 2001
Jul 2002
Feb 2003
Sep 2003
Apr 2004
Nov 2004
Jun 2005
Jan 2006
Aug 2006
Mar 2007
Oct 2007
May 2008
Dec 2008
Jul 2009
Feb 2010
Sep 2010
Apr 2011
Nov 2011
Jun 2012
Jan 2013
Aug 2013
Mar 2014
Oct 2014
May 2015
Dec 2015
Jul 2016
Feb 2017
-
Months supply of existing homes on market (Months, SA)
Existing Home Sales (Ths., SAAR)
Number of homes available for sale (Ths., SA)
Source: NAR
3