MBA Trims Mortgage Forecasts as Recession Chances Are Now a 'Coin Flip'

Expectations of continuing high interest rates, signs of a weakening housing market and a “coin flip” chance of a recession led the Mortgage Bankers Association to cut its forecast for originations in the second half of this year, and, to a lesser extent, through all of next year.

The MBA’s July 18 economic and mortgage forecasts showed second-half purchase originations falling 7% and refinances falling 80% from a year earlier. Its June 10 forecast showed a 5% drop in purchases and 77% drop in refinances for the second half.

“The housing sector has been severely impacted by the spike in interest rates,” the MBA said in comments released Thursday. “In an already strained affordability environment, higher mortgage rates have reduced the pace of home sales, and now with the prospect of a weaker economy and an elevated risk of recession, potential home buyers have pulled back even more.”

On Tuesday, the MBA reported that mortgage applications for new home purchases in June fell 12% compared to a year ago.

“The new residential construction data have been weaker of late, with a slower pace of housing starts and permits, along with deteriorating homebuilder sentiment, driven by declining foot traffic of prospective buyers,” the MBA said.

The heaviest downward revisions were for the third quarter. It trimmed purchases by 3.4% and refinances by 16.4%. It now expects third-quarter purchase originations to fall 8.8% to $403 billion, while refinances fall 82% to $92 billion.

For this year, the MBA expects purchase originations to rise 1% to $1.66 trillion. The MBA’s forecast for 2022 purchase mortgages peaked at $1.77 trillion in its March 21 report, and has been cut each month since then.

The July 18 forecast showed refinances falling 70% to $706 billion this year. The MBA’s forecasts for 2022 refinances peaked at $870 billion in its Dec. 21 report. It stood at $861 billion for the first three months of this year, and has been cut back each month since then.

“Rate-term refinances continue to decline with mortgage rates more than 2 percentage points higher than a year ago. We expect the 30-year fixed rate to stay over 5% for the remainder of 2022, ending the year at 5.2%,” the MBA said.

In 2023, the MBA expects purchase originations to rise 2.5% to $1.70 trillion, while refinances to fall 24% to $540 billion.

The MBA said its downward revisions reflect its lower expectations for the U.S. economy. It now forecasts the economy to grow 0.6% this year, down from its previous forecast of 1.6%.

“Higher interest rates resulting from the Fed’s efforts to combat inflation, as well as the persistently high rate of inflation, are causing stresses for households and businesses,” it said. “While a recession is not in our baseline forecast, it is a coin flip at this point, as we estimate a roughly 50% chance that the U.S. could enter a recession over the next 12 months, with the most likely timing being in the first half of 2023.”

The MBA expects the unemployment rate to start to inch up by the end of the year and through next year, breaching the 4% mark by the second half of 2023. It expects Fed rate hikes to push inflation down over the next year.

“We expect inflation to end the year at around 6% before declining to a 2 to 2.5% range in 2023 and 2024,” it said.