The trough for the mortgage origination market is nearing an end point and 2024 is shaping up to be a better year for the industry, economists of the the Mortgage Bankers Association (MBA) said at the 2023 Annual Convention & Expo in Philadelphia, Pennsylvania.

The MBA doesn’t expect the Federal Reserve to hike interest rates further this year as real rates – which are inflation-adjusted– are 2%. 

“They’re already at a place where if they do nothing, and inflation holds or falls further from here, they’re going to be slowing the rate of growth and the cumulative impact of the rate increases they’ve already made are not fully felt yet,” said Mike Fratantoni, MBA’s chief economist and senior vice president for research and industry technology.

Based on the cautious messages from even the hawkish Fed members, Fratantoni projected that the central bank will “definitely not be going to hike in November, a small chance that they would come back in December if these numbers turn around.”

The MBA’s view is that the Fed will cut interest rates three times in 2024 and inflation may come down a bit faster as a result. 

“I’m pretty confident that if this rate path precedes as we’re expecting, this is the bottom. 2023 is going to be the low-volume (mortgage origination volume) year for this cycle. So after falling 50% from 2021 to 2022, our current estimate has it falling almost 30% from 2022 to 2023. But then a rebound in 2024 — up 19%,” Fratantoni said.

Purchase originations are forecast to increase 11% to $1.47 trillion next year.

In terms of units, the MBA expects about 5.2 million units in the total number of loans originated in 2024, up from this year’s expected 4.4 million.

“It’s still a pretty challenging environment relative to if you look back historically, this is close to where we were in 2014. Maybe just below where we were in 2018 — still a challenging year for the industry,” Joel Kan, vice president and deputy chief economist of MBA, said. 

Mortgage rates will drop, but challenges linger

MBA’s baseline forecast is for mortgage rates to end 2024 at 6.1% and reach 5.5% at the end of 2025 as Treasury rates decline and as the spread narrows.

The historically high spreads between mortgage rates and the 10-year Treasury yield – which was triggered by the uncertainty about monetary policy and the direction of quantitative tightening  – will resolve in a “favorable direction over the course of the next six to 12 months,” Fratantoni added.

The MBA raised expectations of a mild recession in the first half of 2024 due to the combination of the cumulative impact of the rate hikes, the banking system tightening down on all forms of credit and the slow global environment all leading to a slowdown in the US. 

The unemployment rate is expected to rise to 5% by the end of 2024 from the current rate of 3.8%. Inflation, in return, will gradually decline towards the Fed’s 2% target by the middle of 2024, Fratantoni said.

As mortgage rates come down to the 6%-range in 2024 and the 5% range in 2025, borrowers will see less of a trade-off in moving, Kan projected. 

Kan added: “I think that’s when you’re going to see more inventory free up, that’s when we’re going to see more of these housing transactions able to take place.”

The MBA anticipated first-time homebuyers will account for a large portion of housing demand over the next few years, given the largest age cohort entering its prime homeownership ages. 

“There will still be challenges, as median purchase and interest payments remain high, for-sale inventory is scarce, particularly for entry-level homes, and credit availability is low,” Kan said.

A couple more painful quarters ahead

The mortgage origination market for banks and independent mortgage banks was painful given that they all saw five consecutive quarters of net production losses. 

While production losses were less severe in Q2 2023 from the previous two quarters, lenders are projected to have a few more painful quarters until the end of the spring of 2024 – mainly due to the traditionally slow winter season, Marina Walsh, CMB and vice president of industry analysis, anticipated. 

For lenders, excess capacity continues to be a challenge with low productivity levels and high expenses per loan.

“Lenders have reduced their head counts and gross expenses, but the record-low volume is a primary driver of these escalating per-loan costs,” Walsh said. 

The MBA previously estimated that a 30% decrease in the mortgage industry employment from peak to trough will need to occur, given the decrease in production volume.

The MBA estimated that the industry is roughly two-thirds of the way there from the previously mentioned 30% overcapacity in the industry. 

Mortgage industry employment dropped 20% in 2023 from the peak in 2021 and the number of active MLOs for state-licensed companies dropped 29% from the same period, according to the MBA.

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