Interest Rates, Housing Sales and Residential Lending Forecast — August 2020

As the pandemic progresses, it appears more evident that the housing sector is providing buoyancy to the U.S. economy as record low interest rates drive housing demand and reduce monthly payments for millions of households able to refinance their home mortgages. Following is a summary of the latest August 2020 forecasts from Fannie Mae and the MBA for interest rates, existing and new-home sales and residential lending. Freddie Mac forecasts these also, but only on a quarterly basis. Fannie Mae and the MBA continue to remain relatively optimistic despite the Q1-Q2 recession (which may have ended – data will yet decide) and ongoing drag on the economy as many businesses remain throttled back due to Coronavirus.

Interest Rates

Conventional mortgage interest rates once hit an all-time record low 2.88 percent in the first week of August as tracked by Freddie Mac in their weekly Primary Mortgage Market Survey. Weekly 30-year, fixed-rate conventional mortgage rates since 1972 are shown in the following graph along with recessions. The second graph shows the same data series since 2017 in a higher-resolution view.

Expectations of rates for 2020 and 2021 are shown in the table. While Fannie Mae and the MBA agree the average rate in 2020 will be 3.1 percent, they diverge in 2021 with Fannie Mae forecasting a down tick to 2.7 percent and the MBA expecting rates to rise to 3.3 percent.

Existing Home Sales and Median Prices

Both Fannie Mae and the MBA improved their forecasts for existing home sales for 2020. Fannie Mae changed from an expected 7.5 percent decline in the July 2020 estimate to a 4.5 drop as of the August outlook. The MBA moved from an expected 3.8 percent decline to a 3.2 percent drop as of July and August, respectively. The MBA comes in higher for 2021 with existing home sales at the 5.6 million level (up 8.6 percent year-over-year) and Fannie Mae up just 1.8 percent at the 5.2 million level. Both see a 4 percent increase in median values in 2020, with the MBA slipping to 3.0 percent rise in 2021 and Fannie Mae showing median prices up just 1.4 percent.

New Home Sales and Median Prices

While the MBA expects a 6.9 percent spike in new home sales in 2020, Fannie Mae forecasts a minimal 0.9 percent gain compared to 2019. New home sales in 2021 are projected to rise 3.0 percent and 4.0 percent according to Fannie Mae and the MBA, respectively. Their forecasts for new home median prices range from 2.3 percent to 2.5 gains in 2020 and from 1.2 percent to 2.9 percent in 2021.

Residential Lending

The surprise in 2020 continues to be record low interest rates driving residential mortgage originations to a likely second largest lending volume in history, topped only by the $3.76 trillion in 2003. Despite having differing views on total lending volumes for 2020 and 2021, the MBA and Fannie Mae are forecasting an almost identical change in total lending volume for 2020 (up 38 percent) and 2021 (down 28 percent). Refinance lending volume is forecast to be up 82.7 percent this year and down 50 percent in 2021.

Quarterly lending volume estimates are shown in the following table.

Jobs drive home sales and are the real unknown in these forecasts. Given the severity of impact of the pandemic on the economy, these forecasts are relatively optimistic views that would lead to the conclusion that the brute force of the downturn is not on those in the homebuying segment nor across current homeowners. The assumption of high refinance volumes corresponds to continued employment among existing homeowners while relatively robust home sales levels portends to ongoing employment and higher credit scores across homebuyers. That leads to the conclusion that renters have born the burden of the economic downturn as there are an estimated 16.88 million unemployed Americans today, up from 6.22 million as of the end of February.

Jobs are everything to the economy. And to home purchases and refinance lending volumes.