Mortgage volume forecasts shrink due to sinking economy

Mortgage industry economists have downgraded their outlooks for U.S. gross domestic product growth, and the resulting uncertainty led to a downward revision for originations in their July forecasts.

But they vary on the direction of purchase volume in the future and whether the U.S. is definitively heading for a recession. Another factor in the forecast changes is that mortgage rates continue to rise, with the latest Freddie Mac Primary Mortgage Market Survey up 3 basis points to 5.54%.

Freddie Mac is the most optimistic of the three, but it dropped its total volume outlook to $2.84 trillion from $3.06 trillion from its last forecast issued in April.

Next is Fannie Mae, whose July prediction for 2022 of $2.53 trillion was $8 trillion lower than June's $2.61 trillion.

Finally, the Mortgage Bankers Association now calls for $2.37 trillion in total originations this year, down from $2.41 trillion a month ago.

But the MBA is diverging from the other two, as it still expects record purchase origination activity by dollar volume for not only this year, but for 2023 and 2024 as well.

The MBA is predicting $1.66 trillion in purchase volume for 2022, up from $1.65 trillion last year, while in 2023 it calls for $1.7 trillion and $1.8 trillion the following year. It is still lower than its June forecast for 2022 of $1.68 trillion.

Any dollar volume gains are a function of higher home prices. The MBA outlook for units originated expects a decline to 4,446 purchase loans this year and 4,374 in 2023 from 4,876 during 2021, before rebounding to 4,494 in 2024.

GDP growth should end 2022 at 0.6%, a change from June's forecast of 1.6%, MBA Chief Economist Mike Fratantoni said in a statement. The Federal Reserve's continued tightening will increase economic stress for households and businesses.

"While a recession is not in our baseline forecast, it is a coin flip at this point, as we estimate a roughly 50% chance that the U.S. could enter a recession over the next 12 months, with the most likely timing being in the first half of 2023," Fratantoni continued.

The elevated risk for a recession has led potential homebuyers to pull back further from making a purchase in the past month. "Additionally, the new residential construction data have been weaker of late, with a slower pace of housing starts and permits, along with deteriorating homebuilder sentiment, driven by declining foot traffic of prospective buyers," Fratantoni said. "As a result, we lowered our forecast for single-family starts and home sales, leading to lower purchase originations."

Fannie Mae revised downward its forecast for total home sales growth in 2022 to a decline of 15.6%, from last month's drop of 13.5%. However, it pushed up its home price appreciation forecast to a 16% year-over-year gain this year from the previously projected 10.8%.

Fannie Mae’s Chief Economist Doug Duncan is more certain the U.S. is heading for a recession, pushing up the expected start date to the first quarter of 2023.

"With inflation running well above the target rate, the market’s expectation that further, substantial monetary tightening is needed has driven interest rates even higher, and interest rate-sensitive sectors, including housing, are slowing in response," Duncan said in a press release. "Homes listed for sale are increasingly seeing asking-price reductions, and both construction and home sales — both existing and new — are slowing."

Fannie Mae now expects $1.78 trillion in purchase volume this year, down from $1.86 trillion for 2021. In June, Duncan predicted $1.81 trillion of purchases in 2022. The 2023 purchase forecast was increased, however, to $1.71 trillion from June's $1.69 trillion.

Freddie Mac's third quarter forecast reversed its outlook on the purchase market, as it now expects a drop to $1.96 trillion from last year's $2.0 trillion. The government-sponsored enterprise's second quarter outlook expected purchase to grow this year to just under $2.1 trillion.

Sam Khater, Freddie Mac's chief economist, also cut his 2023 purchase prediction to $1.88 trillion from the second quarter's $2.22 trillion.

"Although house price appreciation will grow at a more moderate rate, home prices remain high relative to homebuyer incomes," Khater said in a press release. "Taken together, these factors are exacerbating affordability challenges and causing a slowdown in the housing market.