Posted on Wednesday, December 8, 2010
As in the past, key macroeconomic drivers of the economy – such as income growth, unemployment rate, and inflation – will affect the performance of the housing and mortgage markets in 2011. With fiscal policy supporting aggregate demand for goods and services and an accommodative monetary policy providing low interest rates and ample liquidity to capital markets, the economic recovery should accelerate gradually over the year, with the second half of 2011 exhibiting more growth and job creation than the early part of the year.
With that as the macroeconomic backdrop, these forces will support a gradual recovery in the housing and mortgage markets. Here are five features that will likely characterize the 2011 housing and mortgage markets:
• Low Mortgage Rates. By November, fixed-rate mortgage rates had drifted down to their lowest level since the early 1950s. This laid the foundation for a substantial refinance boom, with refinance accounting for four out of every five single-family loan applications. With Fed observers expecting the central bank to keep the federal funds rate at its current target range of 0 percent to 0.25 percent for most (or all) of 2011, relatively low mortgage rates will be a feature of the 2011 mortgage market. While some rise in fixed-rates is expected, 30-year fixed-rate loans are likely to remain below 5 percent throughout the year, and initial rates on 5/1 hybrid ARMs will likely remain below 4 percent in 2011.
• House-Price Recovery. Softness in house prices generally occurs in the autumn and winter months related to the seasonal slowdown in home purchases, and this season is little different from past ones in that respect. Those local markets that have relatively large inventories of for-sale homes and real estate owned (REO) dispositions will continue to see home-value weakness in 2011. However, price indexes for the U.S. as a whole are likely close to bottoming out. Most experts look for single-family U.S. indexes to bottom out in the first half of 2011, with a gradual (but sustained) recovery after that: The Wall Street Journal's Economic Survey for November found that economists expected the Federal Housing Finance Agency's U.S. Purchase-Only House Price Index to rise by an average of about 1 percent over 2011.
• Homebuyer Affordability. The three main ingredients that affect buyer affordability are mortgage rates, house prices, and income. With the first two at or near cyclic lows, buyer affordability is at the highest level in decades. The National Association of Realtors' Affordability Index for the third quarter reported one of the most affordable buying markets since the inception of the index in 1971. With affordability high, many first-time buyers will be attracted to the housing market in the new year, likely translating into more home sales in 2011 than in 2010.
• Fewer Mortgage Originations. More sales in 2011 generally mean more purchase-money originations, and that should be a feature of next year's market. However, refinance activity will likely dwindle over the year as a result of at least three factors: (1) many borrowers have refinanced over the past year or are currently in the midst of refinancing, and hence will have little need to do so again in 2011; (2) Making Home Affordable's Home Affordable Refinance Program is scheduled to expire on June 30, further dampening second-half refinance volume; and (3) while fixed-rates are likely to remain below 5 percent, these rates are also expected to move gradually up during 2011, reducing the financial incentive to refinance for those borrowers who have not done so already. The expected decline in refinance originations more than offsets the potential pickup in purchase-money originations, leading to lower total lending in 2011.
• Lower Delinquency Rates. Single-family mortgage delinquency rates remain extraordinarily high but have begun to decline in the aggregate. Based on the last several business cycles, the share of loans 90-or-more days delinquent or in foreclosure proceedings, known as the "seriously delinquent rate," generally crests within a year of the start of the recovery in payroll employment, and this economic recovery appears to fit within that pattern. Payrolls began to rise last January and by the spring the seriously delinquent rate had begun to decline. Look for the seriously delinquent rate in the overall market to gradually decline further during 2011, reflecting employment gains and family income growth, additional loan modifications and other foreclosure alternatives, and the transition of foreclosed homes to REO.
By Chief Economist Frank Nothaft on December 6, 2010