Recent Developments
U.S. Economy:
The U.S. economy has shown resilience by exceeding expectations, with a remarkable economic growth rate of 5.2% in Q3 2023, marking its peak since Q4 2021. Notably, the recent expansion stands out as one of the fastest in the past two decades—if the tumultuous years of 2020 and 2021 are set aside. The primary catalysts for Q3’s vigorous growth were consumption and investment, collectively contributing 4.2 percentage points, nearly doubling their average pre-2020 recession impact.
The labor market has burgeoned impressively, evident from the addition of an average of 232,000 jobs per month this year—an astonishing figure when juxtaposed with the five-decade low unemployment rates of 2023. The year’s payroll growth further underscores the labor market’s momentum, illustrating a steady monthly job creation outpacing that of 2019 by approximately 70,000 positions.
Surprisingly, despite such vigorous labor market and economic performance, inflation pressures continued their descent. As of October 2023, the Core Personal Consumption Expenditures (PCE) price index escalated by just 3.5% year-over-year, the least notable increase for the index since April 2021.
U.S. Housing Market:
The home sales landscape showed signs of slowing, with consistent drops each month from July 2021 and an 11% decline from the previous year as of October 2023. Sales of existing homes tumbled by 15%, reaching new lows not observed since 2010, and pending home sales dipped to a record low index. Although new home sales experienced a dip in October, they maintained an 18% year-over-year growth.
U.S. Mortgage Market:
Mortgage rates experienced a downturn as reflected in Freddie Mac’s survey, with a significant 0.8 percentage point drop leading into December, spurring a surge in home purchase applications. Current trends indicate a heightened market sensitivity to mortgage rate fluctuations, suggesting further declines might be necessary to sustain buyer interest.
Outlook:
Looking forward, 2024 anticipates a moderation of 2023’s robust economic growth to align closer with long-term trends, with consumer spending likely to lessen and employment growth expected to decelerate. This could lead to a slight increase in unemployment rates alongside a further easing of inflation. However, inflation is expected to remain above the Federal Reserve’s 2% target, potentially prompting the Federal Reserve to maintain or reduce rates throughout the year.
Mortgage rates may see a gradual relaxation but are predicted to hover between 6% to 7%. Lower rates may alleviate affordability concerns but aren’t expected to inject a substantial volume of inventory into the market. Consequently, the home sales market could mirror 2023’s traits, with transaction volumes low and inventory scarcity persistent.
The looming economic slowdown and temperate job market may suppress housing demand, yet house prices are forecasted to climb by 6.3% in 2023 and 2.7% in 2024 due to tight inventory. These conditions imply a subdued purchase origination volume in terms of transactions, despite a potential modest uptick in dollar volume driven by rising house prices. As mortgage rates are not anticipated to decline significantly, refinance origination volume will likely remain low in 2024, but both purchase and refinance activities should see better days in 2025.
In addition to these factors, there is an upswing in value-based mortgage lending quality and an upsurge in alternative loan types such as DSCR loans, indicating a growing robustness and diversification in the mortgage market. This trend is expected to continue in the coming years, with lenders becoming more cautious and selective in their lending practices. Furthermore, the rise of digital mortgage processes and fintech companies entering the market may also contribute to a more competitive and innovative mortgage industry.
Overall, while there are some potential challenges ahead for the mortgage market due to economic factors, there are also opportunities for growth and improvement. By adapting to changing trends, embracing technology and innovation, and maintaining a quality-driven approach to lending, the mortgage industry can continue to thrive in the coming years. With careful management and strategic planning, both lenders and borrowers can navigate through any uncertainties and take advantage of the potential growth opportunities in the market.
As we look towards the future of the mortgage market, there are also discussions and debates surrounding potential regulatory changes and policies that could impact the industry. These include topics such as housing affordability, mortgage underwriting standards, consumer protection regulations, and more. It will be crucial for industry players to stay informed and adapt to any potential changes in order to continue operating successfully.
https://www.freddiemac.com/research/forecast/20231220-us-economy-expanded-in-2023
https://www.forbes.com/advisor/mortgages/mortgage-interest-rates-forecast/
