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Although the “Year of the Coronavirus” is not quite over, it is already apparent that 2020 will be the biggest year ever for mortgage originations. The blog gives a summary explanation of how we got here and what we expect for next year.
At our last update in early August, the economy was beginning to recover from the shutdowns necessitated by the COVID-19 pandemic. Rates of new infection were down, consumer spending on nearly everything was up, and many jobs were being restored. The second estimate for Q3 showed real GDP rose sharply from Q2, thanks in large part to fiscal and monetary policy stimulus efforts. However, it was still -3.5% below the Q4 ’19 peak. In comparison, this is nearly as far below peak GDP as the full peak-to-trough decline during the Great Recession (-4.0%), so this has been a much steeper shock (-10.1% from peak) and more rapid recovery trajectory than before.
As summer has transitioned to fall, conditions have continued to evolve quickly. COVID-19 infection rates are now accelerating and are beginning to slow economic activity again. On the political front, our closely contested election will bring a new administration to power in January, but it seems likely that it will retain the current status quo in Congress. With this result, no new fiscal stimulus seems likely, at least at the current time.
What has driven the surprising rise in home purchases? Early on, we expected that layoffs and economic slowdown would curtail home purchase demand, and it certainly did for a short time. However, rock-bottom mortgage rates brought many prospective homebuyers who were not severely impacted by the slowdown out into the market. Moreover, the work-from-home movement drove many renters to finally leave their cramped apartments for homes of their own, often in the suburbs. These factors created a suddenly booming home purchase market over the summer which has persisted into the fall. Part of this has been pent-up demand from the initial shutdown, but we now agree with many analysts in concluding that a demand shift has occurred here: The low mortgage rates and working from home have increased renters’ demand for homeownership.
This can be seen in the chart below. Compared to last year’s purchase application pattern, the increased levels of purchase activity from January, February and since June have more than offset the declines experienced in March, April and May.
For 2020, we estimate that purchase originations will rise about 10% to $1.32 trillion from 2019. And with the record low mortgage rates, refinance originations will rise to $2.78 trillion, up over 160% from 2019. At $4.1 trillion, the total will be the biggest year of mortgage originations in U.S. history.
For 2021, we expect mortgage interest rates to remain very low. Nevertheless, refinances will fall off nearly -50% to $1.41 trillion, as most of the homeowners who haven’t refinanced in 2020 finally get around to it. Despite the huge decline, this will still be the third highest refi total in the last decade. The purchase side will be driven by a slower economy due to COVID-19 but offset by the higher level of purchase demand due to low interest rates and the work-from-home movement. Purchase originations will grow about 5% to $1.39 trillion, with more of the growth due to increased loan amounts.
Many questions and risks remain for the economy in general, and for the housing market, in particular. Continued low housing inventories combined with heated demand are driving up home prices. Will high prices snuff out sales gains? How smoothly will forbearance inventories be worked out? How well will the new Biden administration and a split Congress be able to guide the country through more economic pressure? And how badly will this next wave of COVID-19 infections dampen further economic recovery?
We shall soon see.