The U.S. economy grew at a 4.2 percent rate in the second quarter, which exceeded the advance estimate (4.1 percent) and was the fastest pace in almost four years. The resilient expansion reflects a rebound in consumer spending, as well as upward revisions to nonresidential & private inventory investments. For the year, I’m expecting the economy to grow at a rate of 3.0 percent, before moderating to 2.4 percent next year.
Mortgage rates stabilized this summer, but may be on the rise again… After a quick run-up earlier this year, mortgage rates inched backward over the summer & have most recently started to trend higher again. The U.S. weekly average mortgage rate reached 4.66 percent in May of this year & was 4.60 percent as of September 13. Looking ahead, I anticipate the 30-year fixed-rate mortgage to gradually increase again, averaging 4.5 percent this year & 5.1 percent in 2019.
Sales activity is weakening
Home sales declined in the second quarter & showed further weakness going into the third quarter. Specifically, total single-family home sales (new & existing) decreased for a fourth consecutive month in July to an annualized rate of 5.97 million units. New home construction also lost momentum in the second quarter, falling 4.5 percent from the first quarter.
Based on this downward trend, I have lowered my home sales & housing starts projections for the remainder of this year going into next year. I’m expecting total home sales to decline 0.9 percent to 6.07 million in 2018, before increasing 1.8 percent to 6.18 million in 2019. And, my forecast of housing starts to rise 7.5 percent this year & 4.7 percent in 2019.
Among home buyers budget constraints & slight improvements in supply levels, home prices grew at a slower pace last quarter. For the year, I anticipate that home prices will increase 5.5 percent, with the growth rate moderating to 4.5 percent in 2019.
Fewer home sales & slower price growth are weighing on origination’s. The slowdown in home sales & price growth have caused me to further revise my forecast for single-family mortgage origination’s too. I now forecast single-family mortgage origination’s in 2018 to decline to $1.65 trillion (down 8.9 percent year-over-year).
Some final thoughts to also consider is the idea of homeowners cashing out. While the share of cash-out refinances last quarter was the highest since the third quarter of 2008 (78 percent), the total dollar volume of cash-out refinance activity remains much lower than the highs seen a decade ago. Adjusted for inflation (in 2017 dollars), an estimated $15.5 billion in net home equity was cashed out in the second quarter, down slightly from $15.7 billion a year earlier & substantially less than the peak cash-out refinance volume of $102.3 billion in the second quarter of 2006.
Also to note, borrowers who refinanced their first-lien mortgage last quarter either kept the same interest rate or took slightly higher interest rates. Many of these borrowers refinanced not for rate reduction, but for cashing out equity to consolidate other higher interest debt, pay other bills, or use towards home improvements.
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