Economists, just like weather people, make forecasts for a living. Sometimes they win and sometimes they lose. You are free to debate which group gets it right more often. Each group, however, are susceptible to changes in their assumptions. As information changes people need to alter and update their expectations.
In forecasting a hurricane, for example, the forecaster must make assumptions on directions of travel, strengthening or weakening, wind forces, shearing top winds, water temperatures and new fronts and high and low pressure areas that can alter the outcomes. The same is true with lending and home sales. Deviations in economic activity, job growth or losses, interest rates and supply and demand are just a few impacting factors.
When you get new information you can and should change your position or expectations. That has just happened for total residential lending for 2015 and 2016.
Each month, Fannie Mae, Freddie Mac and the Mortgage Bankers Association (MBA) update their forecast of a myriad of economic metrics from interest rates to refinance activity to housing sales. The following table shows each group’s respective forecasts for purchase, refinance and total lending for 2015, first based on the April 2015 forecast and then using their May 2015 forecasts. The following table contrasts these two monthly forecasts. Note that total lending volume for 2015 increased more than 5 percent just from the April to May forecasts.
While this is a material change almost half-way into the year, it is primarily based on new assumptions of interest rates. Rates are now expected to remain lower longer than expected, facilitating people to obtain loans for purchases and refinances at lower rates as the year progresses.
This same assumption for lower rates, however, does not carry into 2016. The following shows the differences between current lending volumes for purchase lending, refinance and total lending volumes for 2014, 2015 and 2016 as of the latest May 2015 expectations from the Fannie-Freddie-MBA forecasts. On average, while the expectation is for an almost 10 percent increase in purchase lending, rising rates are expected to result in an almost 38 percent decline in refinance lending in 2016 compared to 2015.
Interest rates and housing sales are two of the key determinants of residential lending. The following table shows historical rates for 2014 and Q1 2015, plus the expectations through 2016 quarterly and annually. While the MBA and Freddie Mac are forecasting 5 percent and up rates in the latter half of 2016, Fannie Mae continues with expectations in the low 4 percent range.
So where are existing housing sales heading? Up is the consensus of Fannie Mae and the MBA (Freddie Mac does not break out new versus existing home sales so cannot be included). The following shows the historical 2014 and Q1 2015 existing home sales and forecast remainder of 2015 and 2016 existing home sales. Increases are expected each and every quarter through 2016.
The only real downside is the material decline forecast in refinance lending in 2016 as interest rates rise. My recommendation is twofold:
- If you still can benefit from refinancing, the quicker the better. Rates released this week from Freddie Mac still show sub 4 percent loans.
- If you are planning to purchase, either try to do it as quickly as possible or add expectations for higher interest rates into your budget.
The good news is that home sales are forecast to continue to rise.