2019 Mortgage Market Outlook: The Squeeze is On!

Posted By Mark Watson on Jan 22, 2019
This blog post is from 2019 and may be outdated. For the latest insights, visit our main blog feed.

The U.S. economy is humming along nicely in the longest expansion we’ve had in a century.  However, the housing and mortgage markets are struggling.  Lack of sufficient building and reduced household mobility have created a housing inventory squeeze – there haven’t been enough homes available for sale to satisfy demand.   The inventory squeeze has tightened for years, accelerating home prices to the point where many potential buyers have stopped looking.  With the inventory squeeze reducing purchase demand and higher interest rates decimating refinance demand, mortgage originations have fallen and created a profitability squeeze in the mortgage lending industry.

But shifts are underway.  Home sales slowed for much of 2018, and home price appreciation is slowing as well.  Inventory levels are flattening and in some areas are beginning to edge up.  At long last, household incomes are starting to see more sustained growth.  And after a slow start, Millennial home buying is accelerating.
2018-2019 Total Mortgage Forecast Chart

Expectations for 2019

The current economic expansion will continue through 2019, but more signals are emerging that a slowdown is not far off.  The stimulative effects of the 2017 tax cut are diminishing, and with a split Congress, it is unlikely any further significant stimulus will be passed.  The interest rate yield curve continues to flatten, and the stock market has fallen from its September all-time high, suggesting it may have passed its cyclical peak.

For the 2019 housing market, the outlook is cautiously positive.  Delinquency and foreclosure rates are back to normal levels, and home values nationally have now surpassed their Housing Boom peak.  Home price appreciation will be more in line with household income gains.  However, housing inventory will continue to be tight since construction will continue to lag household growth.

For the 2019 mortgage industry, we expect similar dynamics to 2018.  We believe refinance volume is nearing baseline levels and purchase levels will rise enough that there will be only little change in origination volume.  Thus, the profitability squeeze will continue.  Expect industry consolidation to accelerate.

However, if the economy does begin to cool in 2020, that will ease pressure on interest rates and help lead to rising origination volumes.

Mortgage Originations 2001-2019

Key Factors and Trends

The full report includes a great deal of detail on the economic, housing, and political forces shaping the 2019 housing and lending outlook.  In summary, here are a few key points to keep in mind:

  • Robust economic conditions will continue in 2019 giving us the longest economic expansion in over a century.  Growth is expected to moderate late in the year, with a chance of slowdown in 2020.  Inflation is on target, and employment conditions are the best they’ve been in a decade, but interest rates are on the rise.
  • The housing market will continue to struggle despite the fact that delinquency and foreclosure rates have returned to healthy levels.  Inadequate construction has led to an inventory squeeze that has accelerated home price growth to levels where they are constraining sales.
  • Housing affordability has worsened in recent years but is still better than it has been for most of our lifetimes.  Despite that, the homeownership rate is on the rise again after a decade of decline, driven primarily by the late arrival of the Millennial generation to its peak home-buying stage of life.
  • Mortgage originations fell in 2018 but we expect them to rise slightly in 2019.  Rising purchase volumes should offset another decline in refinances.  Profitability will continue to be squeezed for mortgage lenders, and traditional banks will continue to reduce their share of the home finance market.
  • As we finalized this presentation, the federal government shutdown was in its fifth week, the longest shutdown we’ve ever experienced, and it still showed no end in sight.  In our judgment, if this impasse is not soon rectified, it represents the kind of triggering event that could prematurely end the current economic expansion.

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