Will the U.S. economy improve enough in the second half for the Federal Reserve to start curtailing its bond-buying program in the fourth quarter? Or will unemployment fail to sufficiently decline for the remainder of the year, thus postponing proposed plans to start winding down government-sponsored enterprises Fannie Mae and Freddie Mac?
Perhaps more important, will rising interest rates put a damper on the housing market recovery?
While the Mortgage Bankers Association (MBA) upgraded its forecast on mortgage originations for the second half, it has downgraded its forecast for the overall U.S. economy.
In its Outlook for the Second Half of 2013, the MBA forecasts that originations will reach $606 billion in the second half, revised up from the $527 billion it had forecast at the beginning of the year.
The expected increase in originations is due almost entirely to carryover refinance loans originated during the second quarter that will close in the third quarter, the MBA reports.Â
Purchase loan originations are expected to reach $312 billion in the second half, versus the $299 billion originally forecast.
However, due to reduced fixed residential investment and reduced government expenditures, the MBA downgraded its economic forecast for the second half, calling for economic growth to average 2.2% versus the 2.4% it had originally predicted.
The group says it expects unemployment to drop to 7.5% by the end of the third quarter and to 7.3% by the end of the fourth quarter. In a statement earlier this month, Federal Reserve Chairman Ben Bernanke said the Fed would wait to see if there was improvement in economic data – in particular unemployment – before deciding whether to start curtailing its $85 billion-a-month bond-buying program. Specifically, Bernanke said the Fed wanted to see unemployment drop to 7% before making a decision.
In addition, there is some concern that inflation could rise over the next several months due to higher oil prices and housing rental costs.
‘As we said at the beginning of the year, the big unknown for origination volumes was the timing of the market reaction to any statements from Federal Reserve officials regarding the phasing out of quantitative easing and the impact on refinance volumes,’ said Jay Brinkmann, MBA's chief economist. ‘While the magnitude of the rate increase was larger than we had forecast, the timing of the increase and the impact on refinance volumes was pretty much in line with what we had expected.’
‘Part of the reason for the increase relative to our prior forecast for refinance originations for the third quarter is that lenders reported to us a jump in pull-through rates as a result of the rate jump,’ Brinkmann added. ‘Loan applicants were doing whatever they could to protect their locked-in rates, so the applications volume at the end of the second quarter translated into a higher number of fundings in July.’
With regard to overall economic growth, Brinkmann pointed out that the MBA had not been forecasting particularly robust growth to begin with.
‘Consumer spending will be somewhat higher, with the auto and energy-related manufacturing sectors continuing to improve,’ he said. ‘We saw a sharp pickup in residential housing investment in the second quarter, higher than what we were expecting. As a result, we expect that housing investment will continue at current levels but will not be the driver of growth that we had expected in the second half of the year.’
Still, the economy is facing ‘several unknowns’ that could impact growth in the second half.
‘First, the situation in Europe is far from settled,’ Brinkmann said. ‘While there are signs of growth in some of the stronger economies, the austerity measures in several southern European nations are facing increasing political opposition with no clear alternatives. Second, the political situation in the Middle East could flare up, and already, the situation in Egypt has driven up the world price of oil. Third, developments in China could impact that nation's ability to invest in U.S. and other international securities. Finally, the domestic uncertainty over tax rates and what sections of the national healthcare law will be enforced and when continue to hold back small business hiring and investment.’
With regard to unemployment, Brinkmann said the MBA expects to see the economy add about 175,000 jobs per month between now and the end of the year. However, a high percentage of those jobs will be part time or minimum wage.
‘The result is that we are unlikely to see these increases in jobs translate into the same household formation rates and demands for homes that we saw in the past for similar increases,’ Brinkmann said.