MNI INTERVIEW: Fed 'Upside Surprise' To Drag On Housing - MBA

The Federal Reserve's higher-for-longer guidance last week and resulting impact on mortgage rates is another blow to the housing market that will drag down sales further, Mortgage Bankers Association deputy chief economist Joel Kan told MNI.

The Fed's Summary of Economic Projections guidance "certainly added some upside risks to rates," Kan said, and that will be a blow to sales. "The reduction in cuts next year and the higher-for-longer message taken together is an upside surprise."

The MBA's most recent forecast for existing home sales to bottom out in the third quarter at a seasonally adjusted annual rate of 4.14 million will likely be pushed back to the fourth quarter, but Kan is still anticipating mortgage rates to soften in early 2024. "The story is about what happens to rates and inventory."

The housing market has been surprisingly resilient in the face of higher mortgage rates, but the latest leg up higher in borrowing costs will take a toll on home sales, while prices are seen moving sideways. "Our forecast at the national level is for low single digit home price growth in the next couple of years for each of '23, '24 and 2025."

"The current sort of outlook doesn't really change our view on moderating inflation," Kan said. One more Fed hike is not in MBA's forecast. "We're at a point where you're seeing inflation already on the decline." (See: MNI INTERVIEW: Fed's Wright Optimistic On Further Disinflation)

MORTGAGE APPLICATIONS

Mortgage applications continued their downward trend last week, as mortgage rates reached their highest levels in nearly 23 years. Rates over 7% and low for-sale inventory continue to create affordability challenges for prospective buyers, he said.

"If we do get rates coming down in the next year or so, expect purchase activity to pick up again, both from an affordability standpoint and just having more available inventory out there for prospective buyers," Kan said. Purchase applications have remained near a 27-year low for two months as mortgages rates hovered at their highest since 2000.

"There is just really no appetite for refinancing by most borrowers," he said. "We don't expect that to change unless rates come down significantly." Refinance activity is down over 20% from last year and has accounted for approximately one third of mortgage applications.

HOUSING AFFORDABILITY

But Kan and the MBA are expecting a mild two quarter U.S. slowdown early next year, citing a cooling labor market, waning excess savings, rate hike effects kicking in, and climbing debt service. A slowdown would ease Treasury yields and help improve housing affordability that would inflate demand.

MBA data shows homebuyer affordability declined in August with the national median payment applied for by purchase applicants increasing to USD2,170 from USD2,162 in July. The national median mortgage payment for FHA loan applicants was at a record-high USD1,909 in August, up from USD1,854 in July and compared with USD1,469 in August 2022. Data from the Atlanta Fed released yesterday shows housing affordability declined to its lowest level on record in July.

"Looking ahead, our forecast is for rates to gradually decline between now and the end of the year, even beyond that," Kan said. "A decline in rates would not only help affordability but would support inventory over the medium term."