Will economic uncertainty resulting from the Trump administration’s policies and proposals derail the housing recovery?
Although uncertainty related to the administration’s activities appears to be having at least some impact on capital markets, consumer confidence related to housing has, thus far, been unaffected, which bodes well for home sales and increased purchase volume in 2017.
Fannie Mae’s Home Purchase Sentiment Index, a monthly measure of consumer attitudes toward housing, increased by 5.6 percentage points in February to reach a score of 88.3, a new all-time high. The net share of Americans who reported that now is a good time to buy rose 11 percentage points, while the net share who believes that now is a good time to sell rose seven percentage points.
Consumers also demonstrated greater confidence about not losing their jobs, with the net share rising nine percentage points. In addition, the share of consumers reporting that their household incomes were significantly higher than they were 12 months earlier increased four percentage points.
This increased “positivity” is reflected in both home sales and mortgage origination volume forecasts: The Mortgage Bankers’ Association (MBA), for example, recently updated its second-quarter forecast for mortgage purchase volume, increasing its estimate from $310 billion to $322 billion based on increased mortgage application volume in January and February.
An important question facing the industry, however, is whether the uncertainty related to President Trump’s economic policies – including how much time it will take to pass specific measures such as tax and healthcare reform and, further, whether those proposals are watered down or ultimately fail to pass – will begin to erode the “giddiness” consumers currently have about the economy and, more specifically, housing.
Several economists interviewed by MortgageOrb, however, don’t see economic uncertainty as having much of an impact on consumer sentiment – at least not yet. Rather, it would seem that American consumers, including potential home buyers, are more focused on economic indicators such as unemployment and job growth, as well as interest rates, as opposed to economic policy coming out of Washington, D.C.
“My take on it is that [uncertainty] is affecting capital markets more than it is consumer sentiment,” explains Frank Nothaft, chief economist for CoreLogic. “That’s one reason we saw increases in long-term interest rates both for 10-year Treasury yields and also for fixed mortgage rates. But the uncertainty doesn’t seem to be, in my view, affecting consumers that much.”
“[The uncertainty] is really working its way through the capital markets and impacting mortgage investors and showing up in the pricing on mortgage loans,” Nothaft adds. “But if you look at the consumer sentiment indices, whether from the Conference Board or the University of Michigan, consumers seem positively giddy, post-election. In fact, many of those indices are at their highest levels since the Great Recession.”
Nothaft says in his view, rising mortgage interest rates, and, in particular, how quickly they rise, are probably going to be the most important factor impacting consumer sentiment and home sales in 2017. He points out that there are differences of opinion among economists as to how much of an increase it will take to put a significant damper on consumer sentiment as it relates to home sales.
“Typically, with everything constant, higher interest rates and higher mortgage rates are negative for home purchases,” Nothaft says. “So, when you consider that forecasts are calling for home sales to grow one percent to two percent in 2017, in spite of higher rates, is really quite telling: It means that there is an expectation that this economic growth will lead to income growth for consumers – that the economic welfare of the average household will improve – and that’s a powerful offset leading to this increase in the forecasts for home sales.”
Nothaft points out that demographics also play a powerful role in developing forecasts – and this is part of the reason why current forecasts for home sales and purchase volume are well into positive territory for 2017.
“For example, the millennials are the largest cohort, and although they are mostly now in the rental market, many of them have been postponing home purchase until their 30s,” Nothaft explains. “So, what we are likely to see over the next five years, as this group gets into their early 30s, is they’re going to be entering that prime age for ‘looking to buy.’”
In other words, population growth alone is a major factor in determining home sales and mortgage origination. Eventually, a certain percentage of millennials will be looking to buy homes.
Mark Fleming, chief economist for First American Mortgage Solutions, agrees that although economic uncertainty is having a variety of effects on the mortgage market, it is not having any effect on consumer sentiment, which currently is “through the roof.”
“If we look at consumer sentiment today, I do not think it’s showing any impact at all from all this uncertainty,” Fleming tells MortgageOrb. “For example, if you look at the University of Michigan Consumer Sentiment Index, we’re sitting on a value of 98.5 – it did go down two percentage points between January and February, but it’s well above the recession low, which was somewhere around 55.0.”
In fact, consumer sentiment is about where it was during the housing boom, Fleming adds.
“I don’t see why a potential home buyer, right now, in March, would make any significant changes to their decision-making process, with regard to buying a home, based on anything that is happening in Washington, D.C.,” Fleming says.
Mark Palim, deputy chief economist for Fannie Mae, says although he agrees that consumer sentiment has, thus far, been unscathed by the high level of uncertainty resulting from White House policies and proposals, there is always a possibility that uncertainty could begin to erode consumer confidence later on, depending on what happens with housing policy and mortgage rates. It really depends, he says, on “the magnitude of the policy changes and the sequence of the policy changes.”
“There is a lot of expectation around how policy changes might help to continue and extend the expansion,” Palim says. “But at the same time, you have the reality of policymaking. And for elements of policy that have meaningful impact on the economy – like taxes, spending and pretty significant regulatory changes – those generally involve legislation. And the legislative process, just by its nature, is always slow.
“And you can see that [slowdown] happening now – there’s a broad spectrum of opinions within the Republican party on key issues, and they have to work through a lot of that disagreement,” he adds. “At the beginning of the year, people were thinking that maybe some of these things were going to happen a little bit faster. But now we are seeing that things are going to take a little bit longer.
“There is a huge amount of unknown – there’s still nearly as much unknown now as there was at the beginning of January,” Palim continues. “The one place where we’ve gotten a little more clarity is on monetary policy – the Fed has now, through various speeches and its meeting minutes, signaled that we are close enough to full employment and that the rate of inflation is close enough [to its two percent benchmark] that it is comfortable with raising rates a couple of times.”
Joel Kan, associate vice president of industry surveys and forecasting for the MBA, says although it’s possible that policymaking out of Washington, D.C., could ultimately impact consumer sentiment down the road, it would probably take months before that would begin to occur.
“Our view, overall, hasn’t really changed – we’re still looking at slow but steady growth in the U.S. economy,” Kan says of the MBA’s current economic and origination forecasts. “We’re looking at a pretty strong job market in general – upward pressure on wages and increasing rates. But despite increasing rates, we see a strong purchase market – we see the potential for growth. We expect household formation will increase, and there’s going to be a shift to homeownership in the next year or two, so the purchase trajectory is upward.”
Kan explains that the recent adjustment to the MBA’s forecast for purchase volume was really based on the increase in purchase applications that came in January and February.
“The adjustment is a short-term one – we use incoming data from our weekly applications survey to supplement the bigger forecast model – and the data we got in January and February was stronger than we had expected,” Kan says, explaining why the MBA recently tweaked its first- and second-quarter forecasts.
He adds that the MBA’s figures “are based on a certain amount of volatility,” including uncertainty coming out of Washington, D.C., but mainly in terms of its impact on the mortgage business and not so much home buyer sentiment.
“We look at some of the survey data out in the market in terms of where consumer sentiment is going – Fannie Mae has a survey; we also look at the Bloomberg and the Conference Board consumer sentiment measures,” Kan says. “But we haven’t seen a lot of movement in those two recently, whereas on the business side, you can see that there is a lot of optimism. If you look at the NFIB, which is small businesses, and also BSM manufacturing and non-manufacturing surveys, it appears that companies are a little more confident with the new administration at the helm. We do take those into account, but on the consumer side, it gets a little harder because there are so many mixed signals. It’s really hard to predict what consumers are going to do.”
Making it all the more difficult to predict how consumers might react to any kind of market news is the fact that they are able to get information so quickly – which, in turn, creates more unpredictability in how they might react.
“With how quickly information flows these days, whether it is data or news, it’s probably playing an effect, too,” he says.
Nothaft agrees that the speed with which consumers can receive information – and then quickly form an opinion based on that information – has accelerated tremendously, mainly because of the advent of mobile communications.
“What makes the millennial cohort so different from other cohorts is how connected they are with their devices and social media and how they access information,” Nothaft says. “They access information – and make a decision to buy – in a much different way than their parents did. They might be hearing things that are affecting their decision to buy right now, as we speak.”