MBA Says a Recession Still Coming This Year

The Mortgage Bankers Association is sticking with its forecast for a recession this year, but Chief Economist Mike Fratantoni said Wednesday it will be mild and followed by several years of strong home buying from millennials.

CUNA and the MBA had predicted last October that a mild recession would occur in early 2023, later pushing back the start date.

But CUNA’s May 25 forecast backed away from predicting a recession, saying a strong jobs market and resilient household spending had tilted the odds in favor of a soft landing. NAFCU Chief Economist Curt Long has not predicted a recession.

The MBA’s June 20 forecast, released Wednesday, included shifts economic contraction forward by three months. It showed GDP falling 0.7% in the third quarter and falling 0.5% in the fourth quarter. Its May 19 forecast showed slightly shallower dips in the second and third quarters.

Fratantoni, speaking at the MBA Single-Family Research and Economics Showcase 2023 webinar, said a recession doesn’t require two consecutive drops in GDP, but a drop for the second half as a whole.

“While we have seen a slowdown the recession is not here yet,” Fratantoni said. “We are expecting that the U.S. will enter a recession in the second half of this year.”

“We expect that the economy is going to be shrinking in size in the second half of this year and then anticipating a rebound as we get into early 2024,” he said.

The MBA’s June 20 forecast reduced its forecasts for total originations by 1.8% for the second half and 3.8% for 2024. With those revisions, the MBA said it now expects total mortgages will rise 13% to $994 billion in the second half, followed by a 21% rise for all of 2024.

No data was presented for credit unions, but NCUA data showed that while credit unions appear to have seen a smaller drop in originations for 2022, they were right on trend with other types of lenders in the first quarter.

In the MBA’s June 20 forecast, total originations for the first quarter were $333 billion, down 52% from a year earlier. At credit unions, first mortgages were $27.6 billion, also down 52% from a year ago.

Interest rates have remained higher than the MBA had expected. The current 30-year rate is about 6.6% to 6.7%, while the MBA had expected the June 30, 2023 rate to be 6.4% in its May 19 forecast and 5.6% in its Jan. 19 forecast.

The MBA said it now forecasts a year-end rate of 5.8%, compared with 5.2% in its Jan. 19 forecast and 5.6% in its May 19 forecast.

As a result, refinances had the steepest downward revisions: They were dialed back 14% in the second half and 7% next year. Refinances will rise 47% to $233 billion in the second half, then rise 51% to $590 billion in 2024.

Purchase mortgage originations were revised up 2.6% for the second half, but down 2.5% in 2024. Purchase originations will rise 6% to $761 billion in the second half, and rise 12% to $1.57 trillion in 2024.

On the purchase side, Fratantoni said higher rates are affecting the supply of houses, because owners of homes refinanced at the record low rates of 2020 and 2021 are reluctant to sell.

For that reason, the MBA said it is expecting existing home sales to continue to fall this year, but that it is expecting a strong gain in new homes.

“This is not a question of demand, it’s just the demand is shifting from the existing market to the new market where the homes are,” he said. “There is a lot to be bullish about with respect to housing demand.”

Fratantoni said demographics are the reason for that optimism: There are 50 million millennials ages 28 to 38, the median home buying age is about 34, and the rate of homeownership jumps from 39% for those 35 and under to 62% for those 35 to 44.

“It doesn’t happen gradually,” he said. “You just get a whole group of people that were renting for early portions of their adult life and move over to ownership.”

“A tremendous amount of housing demand is coming down the pike and relatively quickly. The pandemic has probably scrambled a lot of the precise timing here,” he said.