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Following the mortgage origination market’s steepest decline ever in 2022, iEmergent expects a further decline in 2023. Both the purchase segment and the refinance segment should fall again this year before rising slightly in 2024. This year mortgage originations will likely wind up below $2 trillion, the smallest market since 2018.
In our last blog article, we discussed how the current housing correction cycle for sales and prices should follow a similar but less extreme path than the Great Recession’s housing correction cycle. The key factor is that home prices have become unaffordable at current income levels, and that dynamic will take some time to unwind.
One way to look at the relationship between home prices and income is as a ratio. At the height of the 2005-2006 housing boom, the median-price-to-median-income ratio peaked at 5.8. From that level of unaffordability, prices fell until that ratio reached its lowest level at 3.9. Then, in the middle of last year, that ratio hit 6.2. Until that ratio drops below 5, we expect home sales levels to remain depressed. And until that ratio drops into the 4.5 range, we believe home prices will continue to fall. That expectation leads us to our updated purchase market outlook for 2023 and 2024. We believe the purchase market will decline by about -13% in 2023 but will resume rising in 2024 by about 6% as sales begin to grow again.
On the refinance side, we expect another subdued year with volumes dropping another -22% in 2023. Although 30-year fixed-rate mortgage (FRM) rates have fallen from their peak levels of above 7 percent near the end of 2022, they remain above 6 percent now and aren’t expected to fall anywhere near the 2.9 to 3.9 percent range that sparked the refi boom in 2020 - 2021. We still expect a mild recession to take hold later this year, but until then, FRM rates will remain near the current level.
Combining this refinance outlook with our updated purchase outlook, we believe 2023 originations will decline by -16% from 2022, with a purchase segment decline of -13% and a refinance segment decline of -22%.
As mentioned in our last note, the biggest “known” unknown continues to be how the economy responds to the Fed’s tightening. Whether inflation falls (it seems headed in the right direction at this point) and the length and depth of the coming recession (or whether we have one at all) will determine much of what happens to housing demand and interest rates – both of which will have a large impact on mortgage originations in 2023 and 2024.