February Forecast Update: Interest Rates-Home Sales-Residential Lending

A favorite economist term is, “Forecasting is easy, except the future.” As an economist, I concur, but forecasting is what economists do for a living. My favorite statement, however, is, “If I agree with your assumptions, then I agree with your conclusions.” That line shows the dilemma in forecasting housing sales and residential lending volumes today. No one is agreeing on where interest rates are heading. Rising interest rates will slow housing sales, diminish price gains and decelerate the refinance wave ongoing today. Vice-versa for declining rates.

Interest rates are critical in predicting home sales and lending volumes. So where are rates heading? Fannie Mae says residential mortgage rates will be lower this year -- dropping from 3.1 percent in 2020 to 2.8 percent in 2021. That’s a 30 basis point decline which equates to an effective dip in rates of 9.7 percent (going from 3.1 percent to 2.8 percent). The MBA says mortgage rates go up from 2.8 percent last year to 3.4 percent in 2021 – posting a 60 basis point gain, for an effective increase of 21.4 percent. That is a big increase, percentage wise. It would raise the monthly payment (assuming 20 percent down on the $303,900 median priced home as of January 2021) from $998.97 to $1,078.20. That calculates out to an additional $79 per month or $1,000 per year ($79.23 and $950.70 exactly).

The latest annual forecasts for 30-year, fixed rate, conventional mortgage loans from Fannie Mae and MBA are detailed in the following table through 2022. The two disagree on past and future rates.

Existing home sales expectations are detailed in the next table. While the MBA sees sales growing double digit in 2021 (+11.7 percent) and just slightly in 2022 (up 1 percent), Fannie Mae sees a still strong 7.0 percent gain this year and an almost 5 percent decline in 2022.

The divergence between the two also covers median price changes as shown in the next table. Fannie Mae is more optimistic in existing home median price gains, coming in at 8.1 percent and 2.8 percent, respectively, for 2021 and 2022. The MBA sees 2021 home price gains at 3.2 percent, 60 percent less than Fannie Mae, and for home prices to essentially be flat in 2022.

New home sales forecasts and median prices as shown in the next two tables. The MBA is more optimistic regarding the number of sales while Fannie Mae sees stronger price gains.

Residential lending forecasts for purchase and refinance lending are shown in the last table. While the two agree on total purchase lending for 2021, they diverge somewhat in 2022. There is a material difference in refinance lending volumes, with MBA’s expectation of more rapidly rising rates snuffing refinance lending volumes more quickly.

What we do know is that 10-year Treasury rates and 30-year conventional mortgage rates have risen in recent weeks, as shown the following two charts. The first shows weekly 30-year residential mortgage commitment rates as reported Freddie Mac from their Primary Mortgage Market Survey. Rates have just turned up in recent weeks. The second chart graphs the weekly 10-Year Treasury yield, which has risen from 0.556 percent in early August 2020 to 1.318 percent this week – a multiple of 2.37. Since the typical mortgage duration is approximately 10 years, these two are usually correlated. This would imply that residential mortgage rates are likely heading up. Soon.