Why don’t we start out with a recap of last year? 2017 will be remembered for relatively flat interest rates, as we began the year with the 10 year UST just above 2.5%, and we appear poised to end the year at 2.5%. The economy grew at an above average rate post the recession which along with tight supply led to rapidly increasing home prices. This helped to push purchase volume up an estimated 6% but was definitely held back by tight supply in many markets across the nation. Refinance volume was also above expectations even though much lower than prior year as borrowers took advantage of rising home prices to strategically take cash-out especially as the 10 year dipped down to almost 2% in September.
To sum up 2017... “Restrained Stability in Purchases and Rates”
Moving into 2018, the purchase market is expected to increase by a modest 7% according to the Mortgage Bankers Association in 2018. Wyndham’s view is that supply constraints will be the primary driver holding purchase growth back. We work with potential borrowers every day through our Priority Purchase pre-approval program, and we hear very clearly each day, especially from Millennials looking to purchase their first home that they can’t find anything they can afford in the locations they want. However, our view is that there is more upside than downside risk in the MBA’s purchase forecast, so we are cautiously optimistic that we may see closer to a 10% increase in purchase volume
The trend for mortgage rates is expected to be a slow and steady increase over the upcoming year. The fed is currently signaling 3 interest rate hikes next year and assuming no major geopolitical event the 10 year should rise to over 3.0% by the end of next year. As we end 2017, the 30 year fixed mortgage is average around 4% and the MBA is forecasting the rate to be 4.6% by the end of next year. There is no one that can accurately forecast interest rates which has been proven the last 7 years as prognosticators have consistent predicted much higher interest rates which have failed to materialize. For example, the 10 year UST is currently well below the 3.00% peak that was hit in early 2014 despite consistent economic growth the past 3 years. Borrowers should keep in mind that even as rates are expected to slowly rise next year, rates never move in a straight line so there will be peaks and valleys that can be taken advantage of. However, now is probably a safe bet and right time to lock into a purchase or refinance because of the strong probability of higher rates as we move through 2018.
Myself and our executive team believes that the industry needs to do more to help first-time home buyers purchase their first home with expanded low-down payment programs and overall loosening of credit. With home prices rising rapidly in most housing markets that are popular with Millennials the inability of Millennials to become homeowners is becoming a real obstacle of economic growth. We are optimistic about low down payment, first time home buyer product and program expansion next year. Also, the mortgage process has become significantly more difficult and costly post great recession, and we are optimistic that 2018 will begin to see improvements to the origination process from both smart changes in regulation and more importantly improvements in technology that make the process easier.
Don’t think I forgot about what most of you are wondering: will the tax reform bill have any effect on mortgages? The short-term effects in 2018 of the tax reform bill are likely to lead to a continued strength in the stock market with increased corporate investing which will likely continue the trend of pushing home prices higher. The passage of the bill has put some immediate pressure on interest rates and to the extent that tax reform leads to higher GDP in the first half of 2018, it could drive interest rates higher and faster than currently expected. This is another good reason for borrowers in the market today to try and move quickly to lock in a refinance or purchase as the risk of interest rates increasing appears much higher than the risk of interest rates decreasing.
Jeremy J. Abig, MBA, CPA is CFO of Wyndham Capital Mortgage and a contributing author to the company blog.Jeremy is responsible for all areas of accounting, finance and treasury at the company and is dedicated to helping Wyndham become one of the top retail mortgage originators in the nation.
Jeremy began his career at Bank of America, where, during his six years there, he rotated through a number of divisions – eventually becoming a Product Controller in Capital Markets for Real Estate Loan Syndications. Upon being accepted into The Wharton School at the University of Pennsylvania, Jeremy made the decision to leave Bank of America and attend one of the top MBA programs in the country. After graduate school, Jeremy worked at Wells Fargo Securities in Residential Mortgage and Consumer Structured Products, but eventually decided to seek out an opportunity with a smaller company more focused on providing individualized customer service to the consumer. In November 2010, Jeremy joined Wyndham Capital and in just two years won CFO of the Year by the Charlotte Business Journal for his exceptional leadership.