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It is now clear – and astounding – that the 2021 mortgage origination market will be even larger than last year’s record-setting, pandemic-fueled $4 trillion market.
In 2020, the COVID-19 pandemic led to extraordinary economic shifts including interest rate declines that turbocharged the refinance market. In addition, the purchase market surged to its own record high, stimulated by a demand shift that brought many new homebuyers into the market seeking safe havens from which to work from home. Many of those new buyers were from the enormous millennial demographic segment, reaching their peak homebuying years. That elevated purchase demand also depleted inventories of homes for sale, further exacerbating the housing supply squeeze and resulting in home price appreciation that exceeded annual rates during the housing boom in 2005-2006. This also accelerated purchase origination dollar volumes.
These dynamics persisted into 2021. And, even though long-term bond rates rose as the country’s economy recovered, mortgage lenders were able to keep mortgage interest rates low enough to preserve the lending boom, leading to another record-setting origination year. We estimate that 2021 refinance volume will come in at $2.7 trillion, with purchase volume at $1.6 trillion, resulting in a total first lien volume of $4.3 trillion.
In 2022, we expect a sharp curtailment in the refinance boom due to two factors: rising interest rates and the fact that most homeowners who had planned to benefit from refinancing will largely have done so. We expect refinances to drop by more than half (-51%).
However, we don’t expect the rising interest rate trend will be enough to derail the purchase side very much in 2022. Bigger influencers will be the continued housing supply squeeze and resulting affordability squeeze. While the growth in purchase originations will moderate from the pace of the last two years, it will still experience a solid gain thanks to continued strong housing demand and home price appreciation. We forecast that purchase originations will rise about 10% in 2022.
Implicit in our forecast are continued modest economic conditions despite the lingering impacts of COVID-19, supply chain constraints, potential longer-term inflationary expectations, and the polarized political landscape. If the last few years have shown us anything, it’s that the country is resilient enough to adjust to even the most extraordinary disruptions.