COVID-19 continues roiling markets; See what's happening with mortgage rates today.

COVID-19 continues roiling markets; See what's happening with mortgage rates today.

HSH.com 2020 Outlook Calendar

Forecast ItemHSH.com expectationDiscussion
Mortgage rates 30 FRM peak 4.375%Mortgage rate outlook
Federal funds Holding steadyThe Fed/Monetary Policy
Mortgage regulations QM patch and TRID reviewsMortgage Regulations
Fannie/Freddie reform Recap & release process getting underwayFannie/Freddie/FHFA
Underwater mortgages 25% or so reductionUnderwater conclusion? Not yet
Home equity / Cash-out refiMore... and someRefinancing & home equity
HECM / Reverse Mortgages Growth in proprietary RMsHECM/Reverse Mortgages
Home Prices 4.5% existing, maybe 2% newHome price forecast
Existing Home Sales Edging higher, 5.4 - 5.45 millionExisting home sales
New Home Sales Up solidly to ~740,000New home sales
Additional thoughts 3 random additional thoughtsA few odds and ends to consider

Mortgage rate outlook

Forecasting mortgage rates is always a challenge, and the further out you go. the greater the margin for error. That's especially true if there are sudden shifts in the economic landscape, as there were in 2019. A year ago, the year started strong with the Fed lifting rates, but by the time we hit midyear, the economy and financial markets were wobbling and the Fed was actively cutting rates, a full 180 degree turn in what for the Fed is near-record time.

While the risk of a sudden shift of course remains, the broad view for the coming year is one that suggests flatness, with just perhaps enough solid economic data and changing Fed expectations as to allow rates to drift higher at times. Certainly, that's not likely to happen in the near term; the Fed's (and other central bank) moves to shore up wobbly economies is only starting to be realized, as each move by the Fed can take perhaps six months or more to be fully felt thoughout the economy. Should firmer conditions emerge, they probably wouldn't be seen until mid-year at the earliest.

Important to keeping rates mostly level, economic growth remains only moderate at best, with GDP settling back down to about 2% after a period of warmer growth. Inflation remains well-tethered, with core personal consumption expenditute (PCE) inflation holding below the 2% level the Fed has hoped to achieve for a while now without success. Soft growth and few price pressures in the U.S. will make if hard for interest rates to rise much, at least on their own; arguably, rising growth and inflation here would need to be joined by at least some of this sort of thing elsewhere, and that doesn't seem a highly likely outcome, at least in the first half of the year.

We're probably optimists when it comes to expectations for firming growth and inflation in 2020. To be fair, there remain plenty of headwinds to expanding global growth, but the rifts between the U.S. and its trading partners that have damped economic growth are turning into deals. In turn, these deals should help stabilize and improve things in a number of places, and the positive feedback loop from trade should help to lift growth in other places to at least some degree. When signs of improvement in other economies have shown in the past, the flow of offshore money into Treasuries has tended to slow, allowing yields to rise and moving mortgage rates up along with them.

With an optimistic outlook for improving global economic conditions, we think that mortgage rates may creep their way back to about 4% on average by mid-year, but probably can't get much higher than about 4.375% for the year as a whole even if everything does go well.

You can track and shop for mortgage rates here.

The Fed / Monetary Policy

It's hard for the Fed's intentions for policy to be made much clearer than they were are the close of the October 2019 meeting. After cutting the federal funds rate for a third time as "insurance", the Fed Chair Jay Powell noted in his post-meeting press conference that "Our current stance of policy is appropriate," as long as the economic outlook doesn't change. As well, Mr. Powell took additional pains to note that [the FOMC] "would need to see a really significant move up in inflation that’s persistent before we would consider raising rates to address inflation concerns."

That's about as clear as it gets. Absent a material worsening in the economic climate, there will be no cuts in short-term rates; absent a sustained push of core inflation above the 2% mark, the Fed won't be raising them, either.

While there of course could be a unexpected deterioration in the outlook (just as there was in 2019, when escalating trade wars and flagging growth in developed economies unnerved financial markets) steps have been already taken by central banks across the globe to address these imbalances, at least to the extent that both conventional and unconventional monetary policy can. Whether they work or not (or how well) is another thing, but lower rates and bond buying programs have at other times boosted the global economy.

The Fed did expand again the use of its balance sheet in 2019, but isn't actively buying up Treasuries and MBS in QE-style economic supports. Rather, it is buying short-term Treasury Bills in order to improve overnight liquidity among banks, a program designed to eliminate the chances of another wild spike in overnight rates like the one we saw in September 2019. Other than that, the Fed continues to recycle inbound proceeds from its holdings, and is slowly trading out the MBS it holds in favor of a portfolio of pure Treasury obligations spread across the maturity curve. With still $1.5 trillion in MBS and agency bonds yet to convert, it will be years before the changeover fully occurs. In the meanwhile, inbound mortgage-related proceeds under $20 billion per month will be invested in new Treasuries; any amounts redeemed above $20 billion will be used to purchase more MBS. A burst of refinancing activity in mid-late 2019 has seen the Fed buy up more than $30 billion in new MBS since the summer, and so in the midst of changing the mix of their holdings, the Fed has also engineered some support for the low mortgage-rate climate.

It it likely that the Fed will be on the sidelines for 2020. Aside from the economic climate hopefully not requiring intervention, the Fed strongly prefers not to make changes to policy in a election year. On a neutral economic playing field that is performing as expected, there's probably an equally-slim chance for both an interest rate cut and an rate increase. Given the sluggish global situation and the unclear outcomes for trade progress in 2020, a tilt to the downside for rates seems to still have somewhat greater weight at the moment. That said, as of December, 4 (of 17) members of the FOMC group expect perhaps one rate increase in 2020, but no change remains the mostly likely course.

For more about the Fed's actions, see our regular updates on Fed policy changes, updated after each Fed meeting.

Mortgage Regulations

We don't expect any tectonic shifts in the mortgage regulatory climate in 2020, but there is a good chance that some of the rules which have governed mortgages since the advent of Dodd-Frank will be getting at least a cursory look. The Qualified Mortgage "patch", a carveout of the Ability-to-Repay rules that allows Fannie Mae and Freddie Mac to "temporarily" purchase loans with Debt-to-Income (DTI) ratios above 43% is slated to expire in January 2021. The CFPB has essentially supported the sunset of the patch on this date; conversely, Congress is considering a de facto extension, and industry groups are pressing for more comprehensive reform of the statute that governs Ability-to-Repay and the elimination of the use of DTI in the calculation altogether.

The question is really one of liquidity for mortgage borrowers. The carveout for Fannie and Freddie has resulted in an estimated 3.3 million loans over the last few years that it is said would not have happened if these loans couldn't be purchased by the GSEs. However, that's not entirely true; the non-QM market has been growing steadily and it's a fair bet that many of the loans would have been made -- just not necessarily at the rock-bottom rates and fees available to conforming-loan borrowers. A range of trade groups and associations responded to the CFPB last summer that "a DTI ratio is not intended to be a stand-alone measure of credit risk and, on its own, is widely recognized as a weak predictor of default and one’s ability to repay." However, it's not clear if any changes will come on the ATR/QM Patch/DTI change front anytime soon.

The Consumer Finance Protection Bureau is also said to be taking a look at TRID, the Truth-in-Lending Act (TILA) Real Estate Settlement Procedures Act (RESPA) consolidated regulation (TILA-RESPA Integrated Disclosures - aka "TRID"). Dodd-Frank regulations require periodic reviews of the efficacy of regulations, and the CFPB's release on the topic noted that the review could result in "modifying, expanding, or eliminating the TRID Rule", but elimination seems unlikely. If you have an opinion about the construct or the timing of the presentation of mortgage documentation to borrowers, you can participate in the process by submitting a comment to the CFPB.

Of course, we'll see if the CFPB itself is a constitutionally-compliant entity when the Supreme Court reviews how it is structured starting in March. Even if its management structure is deemed unconstitutional, it is highly unlikely that all its rules and regulations would be vacated, but rather that a model that does not have a single, all-powerful director would be put in place. A similar separation-of-powers case reviewed by the Fifth Circuit court found the lone-director FHFA's structure to be unconstitutional back in September. The outcomes of both will probably result in management-structure changes, but little more.


Recap, release, repeat. That seems to the be the path that we're on for Fannie Mae and Freddie Mac. It has been 11 years since the GSEs were taken into conservatorship and it seems like it will be a while longer before they will be exiting government oversight and management.

As a starting point, the FHFA has allowed Fannie and Freddie to begin to again build capital from earnings. Previously, all profits from operations had been swept in to the general Treasury and the GSEs could hold only a minimal amount to cover any losses -- about $3 billion each. Given the size of the mortgage-backing firms, this was a wholly inadequate level of reserves and the firms ran the risk that in adverse market conditions they would again need to turn to the government for funding.

The new arrangement allows them to build up capital reserves to a stronger level -- $25 billion for Fannie, $20 billion for Freddie -- that should help insulate the taxpayer to a better degree from any losses that might occur. As of this writing, Fannie is holding $10.3 billion in reserves while Freddie is holding $6.7 billion. As such, it will likely take at least a few more quarters before their coffers are as full as they are allowed to be, and after that, we'll see what the regulators allow.

In the meantime, it looks as though the entities will be preparing for an eventual public offering. Waiting for the GSEs to rebuild through profits what is expected to ultimately be a need to hold $150 billion to $200 billion between them is estimate to take another decade or more, so that's not a viable avenue. However, absent comprehensive housing policy reform from Congress -- a topic they have failed to address for more than 10 years -- the current administration is creating an plan where they will again be private companies.

There are of course any number of unsettled issues, including exactly how the key government backing that makes 30-year fixed-rate mortgages possible and profitable for investors will be made available (probably directly purchased from the Treasury, much like an insurance policy), and whether or not new entities will set up as competitors before or after the GSEs exit conservatorship. That's a ways down the road yet (2022? 2023?) but the process of getting roughly back to where we were before the Great Recession is getting underway.

Getting mortgage regulations squared away and figuring out the future for Fannie Mae and Freddie Mac is key to getting back to a mortgage industry that is more reliant on private mortgage money. To do so, it may be that programs such as those that allow for the GSEs to back jumbo mortgages may need to be curtailed, and at some point there may even need to be a reduction in the conforming loan limit (now $510,400 in 2020 for a single-family home -- and up to $765,600 in "high-cost" areas). With a median existing home price of about $280,000, the current single-family conforming loan limit is about double the needed loan amount with 10% down, it could be claimed that the GSEs have crowded out much of the available space for "private" lending, leaving banks and mortgage companies only space to operate in the jumbo and non-QM alternative lending space.

Changes to the conforming limits and other things that directly impact the housing market probably don't happen in 2020, but certainly the discussion about the space in which Fannie and Freddie can operate will be part of the conversation this coming year.

We track important changes to regulations, regulators and the GSEs in our weekly MarketTrends newsletter.

Underwater conclusion?

As we have for several years now, we wish that this section of the outlook could be eliminated, but that's not yet the case. The good news is that the problem of a homeowner with a mortgage balance that exceeds the value of her home is diminishing, and should current trends in home values continue, we could be nearing the finish line. As of this writing and according to Attom Data Solutions, an estimated 3.5 million homes are still underwater -- about 6.5% of all homes with mortgages -- even as we close in on 10 years since the nadir for home prices in most metropolitan areas. Using a different data set, CoreLogic reckons that 3.8% of all homes with mortgages have balances that exceed the value of the house, and while that is certainly a significant number it is a low for the CoreLogic series and pales in comparison to the 26% of properties that were underwater in the worst portion of the Great Recession.

By our own quarterly analysis, we reckon that there are still 21 major metro areas where at least some homeowners have not seen their homes return to the price that they paid for them. These folks would have had the misfortune of buying a home at or very near peak values during the last boom (for most markets, sometime in the 2005-2007 time period). Although these are mostly smaller and mid-sized metros, the list also includes places with significant populations, like the Chicago-Naperville-Evanston (IL) or Baltimore-Columbia-Towson (MD) metros. It may be several more years before these markets return to peak values of last decade's housing boom, even if steady progress continues.

Even though there may be a gap between the value of the home at the time of purchase and today, that doesn't mean the homeowner has no equity. Years of making regular mortgage payments (as many as 14 years it the home was purchased in 2005) mean that these homeowners have a significant equity stake, as in addition to the downpayment they may have made they would have retired about one third of their original loan balance by now if the loan wasn't refinanced).

We think we will continue to see more some progress o the underwater front in 2020, probably enough to see the Attom numbers drift closer to the mid-2.5 million mark (perhaps a 30% reduction, leaving us with a little more than 4.5% of all homes with mortgage balance above the current value of the home.

Interested in the metros with the strongest and weakest home price recoveries or just want check a market's performance over a given time period?

Home Equity / Cash-out refinancing

With the changes in the deductibility of mortgage interest from the Tax Cut and Jobs Act of 2017, it's little wonder that traditional home equity lending has been curtailed. The interest paid on any amounts of equity not used to "build, buy, or substantially improve" a primary residence is essentially non-tax deductible, so common uses like debt consolidation and more have lost much of their former luster.

Accoring to the Federal Reserve Bank of New York's Household Debt and Credit Report "Balances on home equity lines of credit (HELOC) have been declining since 2009"; since that time, traditional fixed-rate, lump-sum second mortgages have mostly disappeared (for myriad reasons, not the least of which is compliance costs for closed-end credit) but have been replaced by HELOCs that allow for portions to be broken off into fixed-rate and fixed-term repayment schedules. That said, most HELOCs are priced off the Prime Rate plus a margin, typically 2%, and that can make these a useful if comparatively expensive choice for consumers when weighed against cash-out refinancing.

As home prices have gained strongly in a number of markets in recent years, cash-out refis have picked up, most especially at times when 30-year FRM interest rates are below 4%. That's been the case in the third quarter of 2019; Black Knight, Inc. noted in its latest Mortgage Monitor that cash-out refinances have risen by 24% over the first three quarters of 2019, and made up 52% of refinances in the third quarter, with homeowners extracting $36 billion in proceeds, the highest level in 12 years.

As long as first mortgage interest rates continue to remain low, odds favor continued strength in the cash-out refinance market. Black Knight estimates that homeowners had "tappable" equity of $6.2 Trillion in the third quarter of 2019, very close to a record high level. However, being able to get a lower mortgage rate (or at least one comparable to the mortgage being refinanced) is key; after all, it's unlikely that a homeowner would want trade a mortgage with a 3.75% rate for one with both a higher balance and a higher interest rate to boot.

This being the case, and with mortgage rates not expected to decline by much if at all, the pool of those who can profitably do a cash-out refinance will likely begin to be drained over time, and those looking to tap equity will likely again turn to home equity lines of credit, so we think there may be some pickup in new HELOC originations in 2020 if first mortgage rates are level to slightly higher as we expect.

How much equity might you have in your home today... or in the future? Try our Home Equity Calculator and Projector.

Reverse Mortgages

It's been a rough couple of years in the Home Equity Conversion Mortgage space. After HUD tightened the rules for getting a HECM back in 2017, volumes of new originations have declined from about 55,000 in 2017 to just 31,000 in 2019, a level less than a third of what it was 10 years ago. For FHA, that's by design, as its reverse mortgage program was putting considerably strain on its MMIF, the self-insuring pool FHA uses to cover losses.

Thanks to favorable economic conditions and tighter underwriting standards, the losses in the MMIF attributed to HECMs is shrinking, dropping by about half from 2018 to a current $5.92 billion. It's possible that additional tightening may yet come; FHA Commissioner Brian Montgomery said in an interview that FHA is "considering some other changes" and that "I don't think we ever envisioned that the FHA reverse mortgage product would dominate the market for now, almost 30 years."

Proprietary reverse mortgage lending (sometimes called "jumbo reverse mortgage" lending has been on the increase in recent years, but numbers on exactly how many private RMs are being made (or the terms and conditions under which they are being made is unclear). Still, private lenders have again started to express interest in the space.

Despite improvement, the HECM program is still creating losses for FHA, even as the "forward mortgage" portfolio is capitalized well beyond the 2% level the statute requires. Looser underwriting standards for HECMs is not in the cards (and there is no reason to expect an FHA MIP cut for forward mortgages, either) as the FHA looks to bulk up its reserves in anticipation of the next housing downturn, whenever it comes. At best, originations of HECMs are in for another slow year -- probably on the order of what we saw this year, although the first month of HUD's fiscal year (October) started off pretty strong. However, with equity positions pretty deep in markets with high housing prices and boomers continuing to move into retirement age in droves, we expect to see some continued growth in private RMs in 2020.

You can learn more about reverse mortgages and see average reverse mortgage/HECM rates.

Home prices

In 2018 and into early 2019, a combination of high home prices and cycle-high mortgage rates served began to cool demand for homes, and home price increases had begun to soften, with year-over-year increases in prices for existing homes slipping back in to the mid-3% range for the first time in years. However, a funny thing happened on the way to improving affordability; the economy began to stumble, inflation faltered and the Fed did an about face on policy all in about a six-month period. The result was that 30-year fixed mortgage rates fell by better than a percentage point off from peak to trough in 2019.

The fall in rates spurred demand, and with supplies of homes available for sale still well below optimal levels, median sales prices of existing homes surged again, with year-over-year increases back up to 6.2% in October, according to the National Association of Realtors. One month does not make a year, though, as until about August it looked as though we'd see a continuation of lesser increases. In terms of the trend, in 2017 saw a 5.74% rise in existing home prices, 2018 sported a 4.9% increase and through July it looked like we'd see the 2019 increase settle at perhaps 4% for 2019. Currently, (and pending November and December price data, due out in late December and late January, respectively) we're on track for about a 4.6% or so year-over-year increase, barely below 2018's level. So much for the relative improvement in affordability.

The conditions that create demand for houses and push up prices doesn't seem to be likely to abate much i the coming year. The long expansion (albeit not as strong now as at other times) is expected to continue through 2020; strong job markets and fair wage growth will serve to continue to support housing, as will low mortgage rates and demographic trends, what with millennials now in their prime homebuying ages. Tight supplies of existing homes for sale will persist, keeping pressure on prices, and while more building of new homes will help to a degree, the supply issue is not a situation that will be resolved quickly, let alone in 2020.

For our part, we think that the market may be distorted for a good while yet, as it's our opinion that the Great Recession disturbed the normal cycle of moving from a starter home to a trade up home to a trade-down/retirement home. We wrote a little about this in a November 2019 MarketTrends, and a lack of supply at a time of solid demand amid low mortgage rates seems likely to keep upward pressure on prices in 2020. We think that existing home prices will manage another strong year, rising by 4.5%

Prices of new homes are more elastic and can swing wildly from month to month. In fact, the median price of a new home sold in though the first 10 months of 2019 was actually about 0.2% lower than the median sale price for all of 2018. Over time, and given market conditions, it stands to reason that the median price of a new home sold for 2019 is likely to track the rate of inflation when all is said and done, and that's likely to be the case for 2020, when we'll probably see a 2% or so increase in the median price of a new home sold.

You can reckon what's happened to the value of your home since you've owned it using our MyHPI tool.

Existing home sales

The same conditions that tempered sales of existing homes in 2019 seem likely to remain fully in place come 2020. There should be plenty of demand but little supply, lifting prices. At the same time, stable or perhaps slightly higher mortgage rates won't provide much by way of offset to those higher prices, and as such affordability seems likely to slowly tighten again after improving to a degree in 2019.

At least through October 2019, it looks as though existing home sales for 2019 will end up at about 5.34 million, should the present sales pace roughly persist for November and December. With a still-positive economic trend and solid demographics in place, sales would likely be poised to break out to the upside, but the issue of a lack of supply will continue to put a lid on that. To be sure, some expected increases in home construction should provide at least a little supply relief, and with the gap between the median price of new and existing homes pretty narrow at the moment, perhaps there will be some sellers willing to exit their current properties in favor of a newly-built house. Still, the relief valve of new construction will only provide marginal help at best.

For 2020, we think there's a chance that we'll see a little improvement in sales of existing homes, but just a little, with a final annual tally for the year of perhaps a 1-2 percentage point increase in the number of existing homes sold. At the current working pace for the year, that would translate into perhaps a 5.40 - 5.45 million annual sales pace overall.

New home sales

Despite nearly a decade of reasonably steady improvement, sales of new homes are only actually running at about levels of the mid-1990s, and the despite the population rising from about 266 million to about 329 million people over that time. Still, sales are currently running about three times their recession low point in 2011, so the steady (ff slow) progress since then is moving us closer to normal over time.

It is unlikely that we will see any kind of return to the absolute peak of sales of the early 2000s, when sales of new homes reached a annualized 1.389 million. Leaving out the boom and bust, the numbers suggest that we should eventually return to sales landing somewhere in the low-to-mid 800,000 range, and while this probably doesn't happen in 2020, we do expect to see progress toward reaching that level in 2020.

Unfortunately, the housing markets with the strongest demand also suffer from issues that prevent huge amounts of new homes to be built to meet that demand. Limited buildable land, high land costs, zoning and environmental issues and more in densely populated and coastal markets mean that only limited amounts of new supply can come on line. More exurban areas where these issues start to diminish come with their own sets of troubles, including long commutes and other characteristics less desirable to a homebuying population that seems to prefer walkability, public transportation and a more urbanized lifestyle.

That being said, things seem to be changing again, and the National Association of Realtors list of expected hot metro markets for 2020 includes a number of smaller and mid-tier cities where buildable land and other concerns are lessened, and this should provide some key support for both construction and sales of new homes in 2020.

Sales of new homes picked up smartly with the fall in mortgage rates in mid-late 2019 and will probably end 2019 with about 680,000 new homes sold. We think that some demand moving away from the coast will allow for a faster pace of sales for 2020, and expect to see a 8-9% increase from the current 680,000 running rate of sales, with 2020 probably landing in the 735,000 to 742,000 range when all is said and done.

Additional thoughts

Election year. If anything could add some volatility to financial markets and interest rates, it's the process of winnowing candidates and ultimately determining who gets to be the next President of the United States. Currently, there is still a large pool of potential opponents for President Trump, and these candidate's views range from highly progressive to center-left moderate. We'll know more as the process unfolds; first, in seeing which candidates remain after early caucuses and primaries, and later, when we'll start to see the oddsmakers handicapping the potential victor come November. If a more moderate candidate emerges as the nominee, markets probably won't much react, but one that is to the more progressive end of the scale (if elected) could potentially significantly alter the course of business in 2021 and beyond. Right now, the only thing to do is wait and see how the process shakes out.

Census. America's decennial review of who and where we are takes place next year. We won't see even the initial data for political redistricting until the end of March 2021, but over time the tally will affect everything from tax dollar distribution to who gains or loses representation in the House of Representatives. Eventually, we'll have new OMB updates for metro areas and more, but next year is all about collecting data to guide the next 10 years.

Trade and tariff issues, redux. Just because it looks as though progress is being made on the trade and tariff front, it would be wrong to think that all the issues have been solved. The "Phase One" agreement with China is agreed upon but isn't written yet, let alone what will of course be thorny issues for any "Phase Two" discussions in the coming year. How much blustering and tariff one-upmanship comes next year is an open guess, and beyond China there is the new USMCA to get put in place, issues of escalations in the tariffs for metals from both Brazil and Argentina and certain products originating from European Union nations and probably others. At all times, the threat of sudden changes in trade policy remain just a tweet away.

We'll revisit these expectations and forecasts in early July in our mid-year review.

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