While mortgage rates generally held steady this week, overall mortgage demand remained very strong, rising over fifty percent from a year ago thanks to increases in both refinance and purchase mortgage applications. As economic growth decelerates, it is clear that low mortgage rates will continue to support the mortgage market and we expect that to persist for the remainder of the year.
Mortgage rates continued the summer swoon due to weaker economic data. While economic growth is clearly slowing due to rising manufacturing and trade headwinds, economic fundamentals are still solid for U.S. consumers. The unemployment rate is low, housing affordability is improving, homebuyer demand is rising, and home price growth is stable
An economic slowdown has been widely forecasted, and this brings into question its inevitable impact on the housing market. A slowing economy typically causes a rise in mortgage delinquencies. However, many predict the impact will be minimal.
In the next several months, home-price growth will continue to slow, with Capital Economics predicting it to grow by just 2% in 2019 and remain unchanged in 2020. But because of the market’s tight supply, values will remain strong, and this will incent homeowners to keep up with their mortgages. Further, while the slowdown will also affect the employment rate, this will not cause delinquencies to spike thanks to stricter lending standards since borrowers today are better placed to manage a short-term loss of income.
All things considered, economists predict delinquencies will rise marginally, increasing from its current 4.4% rate to around 4.8% by the end of 2020. That’s not bad at all. That said, the report warns that if the slowdown turns out to be much more severe than expected, the cities hit the hardest will likely be San Francisco, Seattle, Denver and Las Vegas.
However, a lot has changed since the Great Recession, and with stricter lending practices in play, borrowers are better equipped to handle financial shocks, and this, economists say, will cause lenders to offer forbearance to those who do fall behind. This will keep the foreclosure start rate low, with a predicted rise from 0.25% to around 0.30% over the next couple of years.
The risk of a downward spiral from higher foreclosures leading to more delinquencies, as seen in the late 2000’s, is therefore very low.
Despite just a thin majority of Fed interest rate setters supporting the last Fed cut, they will most likely again cut rates in September. This is because trade concerns have worsened, and more importantly, job growth for the year ending 3/31/19 was just revised down by 42,000/month. This means despite tax cuts, the economy and job growth were meaningfully weaker than the Fed thought as they were raising rates in 2018.
The drop in mortgage rates continues to stimulate the real estate market and the economy. Home purchase demand is up five percent from a year ago and has noticeably strengthened since the early summer months, while refinances surged to their highest share in three and a half years. Households that refinanced in the second quarter of 2019 will save an average of $1,700 a year, which is equivalent to about $140 each month. The benefit of lower mortgage rates is not only shoring up home sales, but also providing support to homeowner balance sheets via higher monthly cash flow and steadily rising home equity.
Mortgage rates continued to hover near three-year lows and purchase application demand has responded, rising steadily over the last two months to the highest year-over-year change since the fall of 2017. While the improvement has yet to impact home sales, there’s a clear firming of purchase demand that should translate into higher home sales in the second half of this year.
While mortgage interest rates have moderated, we’re still at nearly three-year lows, which is good news for buyers looking to purchase a home before school starts. The recent stabilization in mortgage rates reflects modestly improving U.S. economic data and a more accommodating tone from the Federal Reserve to respond to the rising downside economic risk from trade tensions and soft global economic data. On the housing front, the latest weekly purchase application data suggests homebuyer demand continues to rise, which is consistent with the slowly improving real estate data from the last two months.
While the industrial and trade related economic data continues to dominate the news, the drop in mortgage rates over the last two months is already being felt in the housing market. Through late June, home purchase applications improved by five percentage points compared to the previous month. In the near-term, we expect the housing market to continue to improve from both a sales and price perspective.
When the Fed last met, economic data was looking good. Now, not so much. Manufacturing is probably in recession, inflation is weakening, the yield curve is inverted, the dollar is strong, and trade concerns are elevated. However, equities are near records, unemployment is ridiculously low, and household spending is good. Given the mix, the Fed’s decision to not change rates but signal a willingness to lower rates is spot on. This sentiment is cause for mortgage interest rates to drop in the future. Good news for home shoppers!