MBA Chief Economist Offers Forecast for 2021 Housing Market

January 22, 2021

Takeaways 

•    Home-buying will remain strong in 2021, though rising prices and record-low inventory could hinder growth.  Refinances should decline, particularly in the second half of the year, as rates rise.

•    Delinquencies remain elevated, with some 2.7 million homeowners in forbearance.

•    Pent-up consumer demand will lead to a spike in spending in the second half of the year and drive higher employment.

•    Interest rates and inflation will increase this year due to a recovering economy and large federal budget deficits.

Home-buying demand will remain robust in 2021, fueled by low mortgage rates, favorable demographic trends and a gradually improving employment landscape, according to Michael Fratantoni, Chief Economist with the Mortgage Bankers Association (MBA). But the economy is hardly out of the woods.

“Even though a lot of people have gotten back to work after the worst of the crisis, it has not been across entire economy,” Fratantoni said. He provided his outlook for the economy, interest rates, employment and the mortgage industry at the SitusAMC monthly MSR Asset Snapshot webinar on January 12. 

Robust Housing Demand to Continue

Last year saw a frenzy of home buying as COVID-19 triggered an exodus from urban rentals, and historically low interest rates boosted buying power. The Federal Reserve will maintain short-term interest rates at zero through 2022, followed by two rate hikes in 2023, and inflation will rise above 2 percent this year, Fratantoni predicted.  

“Millennials are approaching the peak first-time home buyer age, and we are seeing very strong housing demand,” Fratantoni said, adding that the need to work remotely and educate kids from home during the pandemic shifted the locations, size and type of housing buyers desire. “That is leading to a lot of moves and I don’t think we’re done yet,” he added. As a result, 2020 was the best year for origination since 2003, topping out at $3.6 trillion in purchase and refi volume. The MBA expects record purchase volume in 2021.

However, the lack of housing supply and soaring prices could pose an obstacle. “By end of the year, we had 2.3 months’ supply of existing homes, which is an all-time record low,” he said. “There just are not enough homes on the market for those wanting to buy.” 

Meanwhile, the median existing-home price rose 14.6 percent in December from a year earlier. “That’s not sustainable, particularly if this market is going to be tilted more toward the millennial first-time buyer,” Fratantoni noted. “To have home prices increase at two, three, four times the rate of wage growth is going to be really problematic.” On the other hand, sellers may be more eager to list their homes this spring compared to 2020, when uncertainty about COVID-19 made them more cautious.

Employment Likely to Recover by Second Half

The unemployment rate will likely hover between 6 and 7 percent in the first half and then drop sharply by year-end, especially if a third stimulus plan is approved, Fratantoni said. “If the Biden administration is successful in pushing through another large stimulus package, this rebound could be even stronger and last for longer, with unemployment dropping below 5 percent in 2021,” he predicted. 

The vaccine rollout will play a significant role. “There is a tremendous amount of pent-up demand across multiple sectors in this economy and there is going to be a flood of spending by the time we get to the middle of the year,” Fratantoni noted. “That will support some additional hiring in leisure and hospitality, health care and education.”

In the meantime, many of those workers are still struggling to pay the bills. The delinquency rate on Federal Housing Administration loans reached an all-time high of 15.7 percent by the end of June. Loans in forbearance peaked at 8.5 percent by the end of the second quarter, or more than 4 million mortgages, before settling around 5.37 percent as of January 10. The estimated 2.7 million homeowners who remain in forbearance will likely remain there through at least the end of the first quarter, Fratantoni said. 

“Hopefully the unemployment rate drops as we move further into 2021 and more of these folks will be able to start making their regular payment again,” he said. “But this is going to be an extraordinary challenge to the industry this year.” 

To access the full recording of the webinar, click here. To sign up for our next MSR webinar on February 9th, click here.

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