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“The pace of [Federal Reserve tightening] will continue to depend on the incoming data and evolving outlook for the economy.”
Jerome Powell, press conference following FOMC meeting of July 26-27
Since Federal Reserve Chairman Jerome Powell made these remarks this summer, many economic analysts have focused on that “data dependent” approach. It’s not new, of course. It’s what the Fed has always done. Powell just reminded everybody what decision makers should do in uncertain times. That “data dependent” approach is especially appropriate considering:
In our June forecast update blog, we optimistically expected mortgage rates not to rise much higher than where they were at that time, about 6%. That didn’t happen. Rates fell through July and August but changed direction in September. Here in mid-October, they have spent most of the last week above 7%. These are the highest 30-year FRM levels since 2002, significantly above our expectations. While we don’t believe they will remain this elevated for long, the longer they do, the bigger the drag on both purchase and refinance originations, especially going into 2023.
In our June update, we expected Fed tightening to reduce inflationary demand by slowing the economy. It’s too early to call on this one because of the lag between monetary policy moves and their impact on the economy (possibly 12 to 24 months). However, the latest (August) personal consumption expenditures (PCE) are up and the core PCE price index also rose, so neither consumer spending nor inflation are showing signs of abating.
Finally, in our third forecast assumption, we expected that housing affordability pressure would cool home sales and slow home price appreciation (HPA). That happened with a vengeance. Existing home sales, which comprise 85-90% of home sales, declined 26% from January to August, to the lowest level since 2014. We expected that HPA, which had been increasing by 15-20% per year since the beginning of 2021, would slow to more normal single digit, but positive, growth. However, in July, home prices declined. Both the S&P Case-Shiller home price index and FHFA purchase only home price index fell. Such a rapid reversal in the home prices trajectory will likely cool home buying demand even more since few buyers will want to buy in an environment when home values are falling.
These market developments have caused us to sharply readjust our forecast outlook. For 2022, we’ve slashed our refinance forecast to a range around $729 billion and our purchase forecast to $1.689 trillion. For 2023, we expect refinances in a range centered around $628 billion and purchases at $1.740 trillion.
Our revised forecast assumptions expect 30-year mortgage rates not to rise higher than the mid-7% range. We also expect some home price depreciation in numerous markets in the coming year, as some sellers have to discount pricing to close with more skittish home buyers.
The mortgage origination business has always been volatile, but the 44% decline in origination volume this year has been the largest decline ever. The changes this year in interest rates, home sales, and home prices have come startlingly fast with shifts of large magnitudes. In such an environment, a “data dependent” approach is critical to navigating this business successfully.