The year ahead will be characterized by rising employment, inflation, interest rates and housing production, and record mortgage purchase application activity, according to Michael Fratantoni, Chief Economist with the Mortgage Bankers Association (MBA).
“The Fed is sending a pretty strong signal that they are going to remove monetary policy accommodation more quickly,” pushing interest rates higher in the first few weeks of 2022, Fratantoni said. He provided his outlook for the economy and mortgage industry at the SitusAMC monthly MSR Assets Snapshot webinar on January 12. (Register for the February MSR webinar here.)
Historic Inflation Spike Continues
In 2021, consumer prices saw the highest year-over-year rise in four decades to 7%, the Labor Department reported hours before Fratantoni’s presentation, with the core rate at 5.5%, the biggest jump in three decades. Both numbers were in line with economists' expectations.
“For much of this year, I think we're going to see (inflation) numbers in the high single digits as we did today, so the Fed has to respond,” Fratantoni said. The MBA expects the Fed to boost short-term interest rates three times in 2022, and three times again in 2023, with the fed funds rate rising to 2.5% by 2024. As a result, the MBA predicts that the 30-year mortgage rate will rise to 4% by the end of this year, up from 3.5% last week.
“It's not just that prices are increasing today, it's that consumers’ and businesses’ expectations of future inflation have elevated in a way we haven't seen in a long time,” Fratantoni said. “Once these expectations get baked into price and wage adjustments going forward, it gets a little tougher to wring them out. This is why you’ve heard a very, very different tone from Fed officials in the past six weeks.”
Home Price Growth Will Ease
Home price appreciation (HPA) will decelerate as housing construction picks up, freeing up inventory and supporting higher levels of both new and existing home sales, Fratantoni predicted. “We’re still going to get home price growth, just not the rapid home price growth that we saw, particularly in the second half of 2021.” The MBA expects HPA of 5% in 2022, down from an estimated 16% for the full year in 2021.
If supply-chain and housing affordability issues don’t stymie activity, the industry should see record purchase application activity of $1.725 trillion. However, the MBA expects refinance activity to fall 60% to $860 billion. Consumers with older loans “have had multiple opportunities to refinance over the past couple of years, and if they haven't taken a lender up on a 2.7% rate, I’m not quite sure how excited they're going to be about a 3.7% rate,” he said.
Hot Jobs Market Plows Ahead
Meanwhile, the labor market will continue its hot streak, with unemployment expected to fall to 3.5% by year end, or lower. “If you look at the current demand that businesses have for employees, there’s just no sign that is falling off at all,” Fratantoni said. A record 4.5 million people left jobs in November 2021, and there are currently 10.5 million job openings, the Labor Department reported.
Compared to trends during the depths of the Great Recession, the numbers are striking: 1.5 job openings for every unemployed worker, compared to 0.2 job openings in 2009, he noted. “Right now (workers) have got their pick of opportunities, and this is absolutely being reflected in faster wage growth,” Fratantoni said. The MBA expects wages to jump 5% in 2022.
At the monthly MSR Assets Snapshot webinar, SitusAMC shares critical data and commentary to help market participants manage, value, acquire and sell residential mortgage servicing rights. Register for the February event here.