MBA Chief Economist Offers 2024 Housing Forecast at SitusAMC Webinar

Interest rates will continue to decline this year, and mortgage demand will pick up as new home sales rise, according to Michael Fratantoni, Chief Economist at the Mortgage Bankers Association (MBA). He shared his comprehensive forecast for the macro environment, interest rates, housing market and mortgage demand at the January MSR Monthly Snapshot Webinar, hosted by SitusAMC.  

Global Turmoil and the Economic Landscape 

Fratantoni opened by acknowledging the current global turmoil, citing the war in Ukraine, concerns about the Middle East, China's struggle with a property crisis and stagnant economies across Europe. Despite these challenges, the U.S. economy remains resilient, and the strongest among its peers. The appreciation of the dollar against other currencies attests to this strength. 

At the same time, "we are still recovering from a bout of inflation globally that has led central banks to raise interest rates to levels we haven't seen in quite some time," Fratantoni said. He predicts a slowdown in the U.S. job market, amid swooning business demand for labor. The unemployment rate will exceed 4.5% by the end of the year, signaling a potential economic downturn, he said.  

In addition, with deposits down, banks are balance-sheet constrained for the first time in years. "Credit officers are reporting tighter credit criteria across basically every line of business, and most other times in U.S. history, when you get this level of tightening, you get a recession," he said. "Regardless, it's going to be a headwind."   

Trends in Mortgage Rates  

Fratantoni expressed confidence in the Federal Reserve's ability to bring inflation back to its 2% target, and predicted a downward trend in the 10-year Treasury and mortgage rates in 2024. "The Fed is done raising rates unless we get a very, very surprising turnaround in the level of inflation," he said. "At the same time, the Fed is not in any hurry to cut rates." 

The Fed will likely wait until May to cut the benchmark rate, Fratantoni predicted, though the market is betting on the probability of a March cut. The MBA anticipates three rate cuts in 2024, followed by a handful in 2025, with the benchmark rate leveling off between 2.5% and 3%. By year-end, watch for the 10-year Treasury to fall near 3.5%, and the 30-year mortgage rate to move closer to 6%. "To get lower, we really have to have a significant recession, not the slowdown we're forecasting," he said.      

Origination Outlook 

The MBA is forecasting $2 trillion in originations in 2024, up from $1.6 trillion last year. "We expect growth in purchase mortgages from more new and existing home sales, and some growth in refinance, almost entirely on the cash-out side," he said, noting that originations should hit the mid $2 trillion mark in 2025 and 2026. "So I fully hope and expect that 2024 is going to be somewhat better year." 

Locked-In Homeowners and Tight Inventory 

“Locked-in” homeowners continue to pose a challenge to the market, Fratantoni said, noting that 60% of outstanding mortgage loans are below 4%. That makes it financially difficult for owners to sell and move and a lack of inventory continues to vex the market. 

"We have more than a million homes for sale nationwide, three-plus months of supply, when five to six months, or 2.5 to 3 million homes, would be more typical," Fratantoni said. "Builders have been doing their best to create more new home inventory; almost a third of homes on the market are new construction. But a lot of the new home sales are concentrated in a small number of markets, and we expect that to continue." 

Still, the MBA expects new home sales to rise by about 10% in 2024, with a pick-up in existing home sales as mortgage rates trend downward. "People are going to be more willing to give up those record-low mortgage rates just because life is going to happen -- they're going to get married, have kids, get new jobs and have to move," he said. "So we're going to see some pickup in transaction volume."    

Home Equity and Consumer Debt   

Fed data shows consumers have just $491 billion in aggregate outstanding home equity loans against almost $32 trillion in equity. "Compare that to 2007, when you had $14 billion or $15 billion in equity, and well north of $1 trillion in home equity loans outstanding," Fratantoni noted. "I do expect it's going to result in some additional cash-out refinance activity, coupled with more home equity lending in the years ahead."  

Rising consumer debt could also give cash-out refis a boost. Consumers have more than $1 trillion in outstanding credit card debt; the average new car loan is around $40,000; and student debt payments are restarting. "You are going to see consumers in stress, and you'll see delinquencies on those other forms of debt increasing," he said. "I think there's going to be a desire to tap in home equity to cover those challenges." Although mortgage delinquencies ticked up a bit in the most recent quarter, they remain extremely low historically, he added.    

View the recording of the presentation here.

You can download Fratantoni's slides here. 

Register for the February 2024 MSR Monthly Snapshot Webinar here.