2014 was unique but predictable in regard to mortgage demand for purchase applications. Looking back on the data now, it was down every single week of the year, year over year, and negative by double digits every week except for four weeks. The good news ( cough cough) is we have pulled ourselves out of the morass that was 2014 and the New Year is upon us.
Comparatively speaking, my outlook for purchase applications is not as negative this year. My 2015 housing predictions include at least 5%-10% growth, year over year, in purchase applications. This is primarily due to having such a low bar in 2014.
Because we experienced 21st century lows in mortgage purchase applications in 2014 and we are now in the 7th year of this economic cycle with employment to population rising, it is not a stretch to expect at least 5%-10% year growth in this purchase applications in 2015. Of course, year over year growth in purchase applications doesn’t mean a recovery when we experienced such low numbers in 2014. Expect housing bulls to highlight the year over year growth without adding the appropriate context.
Let’s remember the 2014 bar for housing metrics is low as is shown in this graph from Anthony Sanders.
With regards to interest rates, the ten-year note is near my predicted low-level range of 1.60% , keeping mortgage rates near the lowest rates of this economic cycle. If the 1.60% level breaks lower, expect a new low print of 1.34%.
However, if I am wrong and we don’t see any growth in 2015 purchase applications and existing home sales stay flat or even go negative, then we will need to admit that home prices have surpassed peak affordability in relation to income capacity. We know this is true for some areas of the country already. The rich can only buy so many homes and there hasn’t been strong household formation to drive first time home-buyer demand. No matter how low rates go, no matter how many jobs are created, no matter what all the king’s horses and all the king’s men try to do… if we don’t have and uptick in household formation and see wage growth, we will not have a true housing recovery.
From now to the end of March we should see some positive year over year prints. By the end of March we will be able to tell how the rest of the year will shape up. I expect existing home sales to benefit from the massive price inflation we saw for new homes in the past few years. In 2015 builders are unlikely to cut prices in order to be competitive with existing homes. New home sales only make 1/10th of total sales though, so the buyer switch from new to existing homes will only have a marginal impact in total home sales.
I expect our prime middle class mortgage buyers to move forward with caution, to be price sensitive and budget conscious and thus drive a trend toward the purchase of older less expensive homes which will marginally help the total existing home sale numbers . And to that rejection of builders over pricing homes I say “Bravo”!
Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial contributor for Benzinga.com