Mortgages: Loan Demand Soars with Rising Home Sales

Mortgages and home sales are showing good strength across most of the country, suggesting that there is some oomph in the housing recovery.

The Mortgage Bankers Association now says that estimates for purchase money mortgage originations—the loans used to buy houses—have been revised upward. Purchase originations are now expected to reach $801 billion in 2015, up substantially from the $638 billion originally forecast for this year.

"We expect," said the Association, "that this trend will continue into 2016 and beyond, as the broader economy and job market continue to improve."

The Association also predicts that mortgage rates will hit 4.5 percent by year-end.

"The positive of the stronger job market will outweigh any negative of somewhat higher mortgage rates. The increase in rates will continue to nudge refinance volume down as expected. Our forecast for refinance mortgage originations remains the same as last month. Refinances are expected to be $551 billion in 2015, compared to $484 billion in 2014," said the Association.

The July predictions from the MBA represent a huge turn-around from the forecast offered by the group last September. At that time, it said:

"Most eligible borrowers have already refinanced into lower rates and it has been estimated that about 80 percent of loans outstanding have a mortgage rate of 4.5 percent and lower. Within the remaining 20 percent, it is likely that many are still underwater, owing more than their homes are worth, or do not have the income or credit to refinance."

The reason for the big increase in mortgage activity is related in large measure to two factors.

First, mortgage rates remain very close to 4 percent, a remarkably-low interest rate by historic standards.

Second, as home prices have risen, owners have more options. They can refinance at today's rates and sell at market values. For many owners a sale was not possible until recently because they were financially underwater, the home was worth less than the mortgage balance. Now, with more equity, they can sell without facing a short sale, foreclosure, or massive credit ding.

It's important to say that while the housing sector is looking better it's not looking better everywhere. For instance, the National Association of Realtors says that home values increased in 148 metro areas during the first quarter when compared with a year earlier. However, prices also declined in 25 areas, meaning the recovery has been uneven.

Freddie Mac has something called the Multi-Indicator Market Index (MiMi). The index is now at 79.2, a number which indicates a "weak" housing market. Twenty-six of the 50 states plus the District of Columbia have MiMi values in the stable range—which means that 24 do not.

Lastly, the Federal Housing Finance Agency (FHFA) says that home values nationwide were up 5.7 percent in May when compared with a year earlier, and just 1.8 percent the 2007 peak.

The Mortgage Bankers Association predicts that "the stronger job market and somewhat higher levels of inflation will lead the Fed to hike in September, and we expect that mortgage rates will hit 4.5 percent by the end of the year. However, the positive of the stronger job market will outweigh any negative of somewhat higher mortgage rates."

I'm not so sure. The international economy is largely a mess and higher rates would boost the federal deficit just in time for the elections. The IMF has called on the Fed to hold off on any rate hike until no earlier than 2016 and the way the world's markets now look such restraint is entirely possible.

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