Outlook: HSH's 2024 Mortgage & Housing Forecasts - Mid-year Review

Mortgage rate outlook

The prospect for lower mortgage rates in 2024 is certainly better than were those for 2023. This news should be at least modestly encouraging to anyone looking to purchase a home or refinance, but as with many things, there are limits. To be fair, it would be hard for mortgage rates to not be improved compared to this year, when 30-year fixed-rate mortgages rose to about 22-year highs.

There are some factors which should help promote somewhat lower mortgage rates in 2024. To start, it is likely that the cycle of hikes in short-term interest rates by the Fed has come to a conclusion. Even should they find some reason to lift rates again, another quarter-point rise would mean little, given the 525 basis point of lift seen in recent years. Such a move would only come if inflation fails to continue to decline or is there is some meaningful (and sustained) reversal of the present trend for prices.

More likely is the reverse, and that the Fed finds reasons to start to begin to loosen policy, if only to avoid having policy inadvertently become tighter as inflation retreats. For a time, nominal interest rates were lower than was inflation, a happenstance considered to be an "accommodative" policy stance. Presently, with short-term rates at 5.25% - 5.5% and core PCE inflation at 3.2%, so-called "real" interest rates are fairly restrictive at about a 2% "real" rate. Should inflation trend down toward 3% while policy remained unchanged, this would add the equivalent of another quarter to half-point of monetary tightening, something the economy likely doesn't need at this stage.

That said, just as a quarter-point increase wouldn't mean much if it came, it's important to remember even should the Fed cut rates that a quarter-point cut (or even a couple of them) will still leave short-term interest rates at elevated levels next year.

Economic growth, too, seems as though it's likely to settle back toward the trend that was in place during the record-long economic expansion, one only ended by the pandemic. Since then, there have been fairly pronounced swings in activity, with GDP running as hot as nearly 7% and as cool as a decline of nearly 2% (in consecutive quarters, even). Of late, the third quarter of 2023 ran as strong as 4.9%, but that was preceded by a string of quarters in the low-to-mid 2% range, a very familiar level before the pandemic and subsequent fiscal and monetary responses to it distorted things. The latest estimate for the fourth quarter pegs growth so far at a solid 2.7% pace for the period, but growth may decelerate somewhat more yet when all is said and done.

During the record-long expansion, routinely modest growth failed to create much by way of price pressures, and probably won't do so now. That's not to say the economic and political climates now are the same as then; they aren't. The global economy may not perform in the same way that helped promote softer growth or push interest rates lower, what with the wash of government debt still flooding the markets here (and elsewhere).

For folks wishing for rapid declines in mortgage rates: The lowest interest rates usually come in the worst economic climates, and no one should openly wish for those. It's also worth considering, given the still-significant supply issue plaguing the housing market, that a considerable drop in rates would likely re-ignite demand -- and more demand with no commensurate increase in supply would mean higher home prices... eroding the value of lower rates.

As we write this outlook, the average offered rate for a conforming 30-year FRM (per Freddie Mac) is just a bit below the 7% mark, its lowest level in more than four months. Having retraced a fair bit of the summer-fall run-up in mortgage rates already, it would not be unheard of to see some of this decline relinquished, so it's not likely to be a straight line down for rates from here.

Looking out over 2024, we think the average offered rate for a conforming 30-year FRM should probably be able to run in a range of 6.3% to 7.3%, with the lower end more likely to be seen after the Fed first cuts rates and signals that more may come.

Mid-year review:
Well, so far so good, at least as a long-range forecast for mortgage rates goes. Through the first six months of 2024, mortgage rates have nearly tested the top of our expected range, rising as high as 7.22% in May, but have also been as low as 6.60% in January. For the most part, they have held in the mid-to-upper part of our forecast, averaging 6.87% for the first 26 weeks of 2024.

Inflation flared in the early months of the year, but does appear to have settled a bit in the second quarter. The economy slowed appreciably to start the year compared to the end of 2023, at least as measured by GDP figures, but the Fed believes that the fundamentals remain very solid, with fair underlying demand and gradually loosening labor market conditions.

If inflation continues to show routine improvement over the coming months, mortgage rates are likely to have some space to decline, and may finish the year more toward the lower end of our expected range. That's of course yet to be seen, but for now, our forecast is turning out well.

The Fed / Monetary Policy

For much of the last half of 2023, it's been our opinion that what the Fed has to say -- it's intentions for monetary policy -- have been more important to the market than what it may actually do. And, to be fair, they have done exactly nothing since the last hike in the federal funds rate back on July 26. Since then, it's all been about the rhetoric and the outlook for the future.

As 2024 begins, there has been no official change to any monetary policy rates, so the greater importance of the Fed's words remains in place. To that end, a change in Fed members outlooks has seemingly set the stage for lower policy rates in 2024, and perhaps up to three quarter-point cuts in rates is the current unofficial outlook from policymakers. This surmises that everything works out as these Fed officials expect it to; that is by no means a sure thing. By way of example, just three months ago, the median expectation was that the December meeting was likely to feature a quarter-point increase in policy rates.

As well, consider that as recently as June 2023, these same folks were forecasting that a full-point cut in rates by the end of 2024 was expected; then with a "higher rates for longer" stance forming through September, this rate-cut outlook suggested only a half-point drop for 2024. Now, this has moved up to perhaps a 0.75% trim over that same time horizon.

All this is to highlight that a forecast of expected outcomes isn't an actual path for Fed policy, which adapts over time as incoming data changes the picture. The most recent (December) update of the Summary of Economic Projections (SEP) reveals this, as there has now been a discernable shift from "higher for longer" for policy rates to one of "higher a while, and lower soon thereafter".

Fed members now expect perhaps three quarter-point decreases in the federal funds rate by the end of 2024, and the median expectation for the level of the federal funds at the end of 2024 is now 4.6%, down from 5.1% back in September.

While it's both hopeful and encouraging for potential borrowers that rates will likely be lower next year, it's also important to temper that enthusiasm. The reality is that a 4.6% median federal funds rate would return it only to about where it ended 2022 and began 2023. This would still be as high as this rate was back in 2007, so the rate would be moving only from about 22-year highs this year back down to 16 year highs. As such, the cost of money will be cheaper, but still by no means cheap.

Aside from adjusting interest rate policy, the Fed continues to also still reduce the size of its balance sheet. Reducing mortgage holdings relies on two things -- mortgage balances being paid down by homeowners, or homeowners refinancing and taking a loan off the Fed's books. With mortgage rates high, refinancing activity has been nearly non-existent for much of 2023, leaving mostly amortization of loans to trim the portfolio. The Fed has a goal to reduce holdings by $35 billion by "runoff" each month; however, since the program's inception, redemptions have averaged only about $14 billion per month (the best month saw a $20.41 billion reduction).

Back when the program started, the Fed held $2.740 trillion in MBS; as of December 6, 2023, this has been pared down to $2.447 trillion. By now, if redemptions and refinances had gone according to expectations, the Fed should be holding about $2.150 trillion, so only about half the expected amount has been retired from the Fed's portfolio.

The Fed also has a stated goal of (eventually) only holding Treasury bonds, but the pace of MBS runoff has been very slow. If runoff was to actually run at a $35B/month rate, it would take about 70 months to erase MBS holdings. At the present pace, it will be 125 months -- more than 10 more years -- to get the Fed to zero MBS holdings. Even to just return MBS stockpiles to where there were before the pandemic QE kicked in (about $1.3T) it will take another 55 months at the current rate of retirement. Any of these paces is likely too slow for the Fed, and is also the reason why they have noted that portfolio runoff will likely continue even when policy rates continue to be lowered.

Given the low level of new MBS issuance (due to the rate climate this year), it's certainly possible the Fed would entertain actually selling off some of its holdings to reach its "no MBS" goal in a more timely manner. Since loans the Fed holds have below-current-market interest rates, this would require realizing losses on sales, which isn't an especially good look, and so probably won't be considered very soon. At the same time, investor appetites for MBS hasn't been all that stellar this year, with banks and others selling their holdings at times, pressuring market mortgage rates higher. Still, and once the path for interest rates becomes more certain, there's a chance that discussions of MBS sales could surface.

As far as short-term interest rates go, we think that the Fed will hold off cutting interest rates for a while into 2024. The first inkling that cuts are coming will probably show in the March Summary of Economic Projections, when the Fed's stated "bias" will likely shift from a neutral stance to one leaning toward near-term reductions in rates. By then, core PCE inflation should have settled to around or perhaps a little below the 3% mark, opening up a little room for the Fed to adjust policy. As noted in the mortgage rates section above, the Fed will need to adjust their policy stance to follow along with declining inflation, if for nothing else than just to keep a constant level of policy restriction in place.

The June SEP will likely point to another one or two cuts to rates before the end of 2024. We'd reckon that would mean September and then again in December, with continued progress on inflation the determining factor for the late-year move.

Mid-year review:
It's been a "wait and see" situation for the Fed so far in 2024. Investor hopes for a string of rate cuts by the Fed this year were largely dashed by a few worse-than-expected inflation readings, which diminished the prospects for lower monetary policy rates. The official outlook from the Fed's June Summary of Economic Projections dovetails nicely with our expectations from late December, in that we thought only a rate cut or two was the most likely outcome for 2024, something Fed members seem to think now, too.

The Fed did make a change to its balance-sheet reduction plans, though. Starting in June, runoff of Treasury holdings were reduced from $60 billion per month to $25 billion per month, slowing the pace and lengthening the time to reach whatever the final amount of holdings may be in the Fed's regime of "ample reserves". While there was no change to the amount of MBS the Fed wants to shed each month -- this portion of balance-sheet reduction remains at $35 billion -- it is also true that mortgage redemptions have been running well below expected levels due to low volumes of refinances and home purchases.

There was one change, though. Should MBS redemptions actually ever exceed $35 billion per month, any excess inbound cash will be used to purchase additional Treasury bonds. Formerly, this cash flow would have been used to buy up more MBS and keep the Fed on a predictable path for balance sheet reduction.

We are still of the opinion that outright sales of MBS will happen at some point, but more likely when the coupon yields on the bonds the Fed holds are considerably closer to market-based interest rates. That may not be the case for a while yet.

Fannie/Freddie/FHFA/FHA

In Washington, it's hard enough to try to get things fixed that are broken, let alone try to address things that work but might be improved. As we close out 2023, it's now been 15 full years that Fannie Mae and Freddie Mac have been wards of the government, and they function well enough that few elected officials are interested in addressing the reformation of the GSEs. All of the remake/reform/release ideas and efforts of the years between the housing collapse and now seem to have gone by the wayside, and many of the champions of those ideas are no longer even in Congress.

Also, as noted below in the regulations section, it's an election year. It's not clear if housing policy is on the minds of any candidate, excepting perhaps the vague goal of "affordable housing". Over the last few years, pressure has been increased for the GSEs to do more for low and moderate-income homebuyers and others, and this is where the focus is likely to remain for 2024, even after there were some controversial changes to loan-level pricing adjustments and mortgage costs for second homes in 2023. The 2023 mission outlook was to "Promote equitable access to affordable and sustainable housing" and to "Conduct business and undertake initiatives that support affordable, sustainable, and equitable access to homeownership and rental housing, and fulfill all statutory mandates" and it's hard to see much effort expended outside of these areas at present.

If you have an interest, how well the GSE are achieving their statutory goals and more can be seen in the FHFA's annual report.

For borrowers more in the mainstream, about the only likely change for 2024 was another increase in the conforming loan limits for 1-4 family homes. The maximum loan amount that applies across all markets is now $766,550, but can be as high as $1,149,825 in certain high-cost housing markets. If reform to the enterprises should ever come, on consideration might be to start reducing the conforming loan limits. Even with record-high existing home prices, the current limit is more than 75% above those levels, leaving very few customers for the truly private mortgage market to profitably serve.

Outside of a continued focus on "mission" loans and "affordability" efforts, it seems likely that there will be little change to consider at the GSEs in 2024.

The FHA, though, could see a change, though, at least in terms of the insurance premiums for FHA-backed loans. In 2023, the FHA's Mutual Mortgage Insurance FUND (MMIF) was capitalized at a level well above the statutory requirement, and a surprise cut to annual MIP premiums for forward FHA mortgages and for reverse mortgages was implemented. For 2024, the capital ratio isn't quite as gaudy, although the 10.51% rate current in place far exceeds the 2% mandatory minimum.

Could another cut in MIP premiums come in 2024? It's not impossible, but is unlikely, since the last cut in premiums happened less than a year ago. Since both the upfront and annual MIP are percentage-based fees, fast-rising home values have helped money flow into the fund while a fairly solid economy has helped losses due to default remain low. Those same rising home values reduce the potential for loss on the FHA's HECM portfolio, a segment that was a trouble spot up until 2020, when leaping home values turned this segment from a negative to a positive. However, it's not likely that home values will increase as markedly in the coming year as they did over the last few.

While there will always be calls to reduce MIP premiums to help lower entry or recurring costs for homeowners, it's worth considering if the next change might be to allow for MI premiums to be canceled when the loan's LTV ratio falls below 80%, as is the case in the conventional market. Presently, borrowers who make less than a 10% down payment on a 30-year FHA loan cannot cancel their MI, regardless of LTV (with 10% down or more, MI can be canceled after 11 years).

Even assuming zero home price appreciation, an FHA borrower starting with a 3% down payment should be at an 80% LTV level at approximately payment 127, or about 11 years after the loan is originated. By this point in the loan (and assuming payments have been made on time) there's likely to be little risk to the MMIF, and it's certainly possible that many FHA loans will have been refinanced into conventional loans to eliminate PMI before reaching the 11 year mark. Any automatic cancellation could even be based purely on payments, not home value appreciation, and so would likely only happen for the relatively few borrowers who have remained in their loans for an extended period of time.

At a time when many folks in office could use bit of a positive press, this might be an easy way to garner some at virtually zero cost today, and probably very little cost (if any) in the future, either. We think it's a possibility for 2024.

Mid-year review:
While there's been little significant change in either Fannie Mae's or Freddie Mac's first-lien business so far in 2024, there is a new pilot program getting underway at Freddie Mac to buy up and securitize second mortgages. This is being done under the premise that it will allow homeowners to access equity in their homes without disturbing a low-rate first mortgage to do so, but this functionality already exists in the "private" market.

There was a time when both Fannie and Freddie made markets for second mortgages, but that was a long time ago, now some 30 years or more. The FHFA's rationale for allowing Freddie Mac to test this second mortgage purchase program outlines the particulars of the program, which is fairly limited in scope.

Full particulars of the program can be seen in the Federal Register.

In theory, this is to enhance access to equity for lower and moderate income homeowners, and is applicable only in cases where Freddie Mac owns the first lien on the property. The pilot program is expected to last 18 months, will total not more than $2.5 billion in originations and each loan is capped at a maximum combined 80% TLTV and a dollar amount of not more than $78,277 (subject to annual adjustment).

It's hard to say if this will have meaningful impact, but it is possible that some homeowners will get access to somewhat lower cost home equity loans, since these smaller-dollar loans will see enhanced liquidity as there will be a ready buyer for them. That said, it's not clear how many folks are clamoring for these.

There have been no changes to the FHA's fee structures or policies so far this year, but FHA Director Julia Gordon said she is hoping to assess potentially changing the [non-cancelation] policy in the years to come, per Inside Mortgage Finance.

Mortgage Regulations

There's probably not much to be expected on the mortgage regulatory front for 2024. The market's primary regulator -- the Consumer Financial Protection Bureau -- is still embroiled in a case before the Supreme Court that may dictate whether or not it has had the legal standing to regulate the mortgage industry, or whether its construct is unconstitutional.

Potential outcomes range from finding that its funding structure violates the Constitution but that its rules are valid and enforceable to a finding that negates everything that has been put in place since its inception back in 2011. With this hanging over both the regulatory authority and the consumer markets in general, it's unlikely that we'll see much by way of new regs being put forth in 2024.

Perhaps the only significant regulatory push of late is pressure on lenders and others to eliminate so-called "junk fees", or add-on costs passed along to consumers as account or loan fees.

Our expectation for a fairly quiet rulemaking year for 2024 is reinforced by the simple fact that it is an election year. An already-fractious Congress distracted by the noise of the election cycle is less likely to want to tackle significant legislative items, let alone muck around in consumer financial and mortgage markets or press regulators to do so.

Mid-year review:
The CFPB's financing structure was ruled to be constitutional on May 16 in a 7-2 majority, so the regulator and regulatory structures in place in the mortgage market remain unchanged.

Perhaps the most broad-ranging measure the regulator has proposed this year is to ban medical accounts from consumer credit reports. "The proposal would stop credit reporting companies from sharing medical debts with lenders and prohibit lenders from making lending decisions based on medical information," said the CFPB, which might raise the credit scores for up to "15 million Americans," and might "lead to the approval of approximately 22,000 additional, safe mortgages every year," according to the proposal. For those of you who are counting, and although the concentration will of course be different, that's about 440 additional mortgages per state.

The regulator has also launched an "Inquiry into Junk Fees in Mortgage Closing Costs". Consumers and other interest parties can provide their feedback up until August 2nd by email at [email protected]. Include Docket No. CFPB-2024-0021 in the subject line of the message.

Underwater mortgages... still

The last couple of years have featured extraordinary increases in home values. Even with many areas still seeing gains, things turned more mixed in 2023. Certainly, potential homebuyers would love to see home prices easing, at least a little, while homeowners -- particularly those who bought homes at or near peak prices -- are hoping for exactly the opposite. If home prices should begin to retreat, the number of folks who owe more on their mortgages than their homes are worth would increase. Even if not underwater, a loss of equity due to softer home values could make it hard for wanna-be sellers to exit properties without losing money.

Even with tremendous gains in home values in the last couple of years, the issue of at least some borrowers in some places holding loans in excess of the value of their home persists. CoreLogic reported that in the second quarter of 2023, the total number of residential properties with negative equity was still 1.1 million homes, or 2% of all mortgaged properties.

Property prices are still well supported, but that's not to say they are rising everywhere. Depending on your preferred gauge, you'll likely find at least some markets with lower values now than was seen last year, especially once you look beyond the top 20 metro areas. For example, the data we use to power our Home Value Tracker shows that 40 of 405 housing markets (~10%) had lower values in the third quarter of this year when compared against a year ago. As well, a seasonally-adjusted HPI data set from the Federal Housing Finance Agency showed 7 of the top 100 metros (7%) with value reductions using the same 3Q22 to 3Q23 comparison. Even a comparison that uses existing home prices in the top 50 metro areas from data provided by the National Association of Realtors revealed 11 of those markets with lower values in the third quarter of this year than last (and a total of about 18% of the 221 metros they track, too).

In most cases, declines were seen in formerly high-flying metros, such as Austin TX or Boise ID, markets which may have become a little overvalued. It is markets such as these that will likely contribute to more homeowners being underwater; however, this unfortunate happenstance is only likely to affect homeowners who bought at or near peak for prices, and even then, there's no value to actually lose unless the home must be sold. Given that these would be pretty recent home purchases, these are homeowners who are probably least likely to sell so soon after buying, especially in light of the highly competitive market they likely fought through to get the home in the first place. Even should it occur any temporary value loss should be erased over time, but until then, some of these folks will probably be counted among those homeowners considered to be "underwater".

On balance, odds favor that the pretty flat trend for underwater mortgages will continue in 2024, likely averaging around 1 million to 1.3 million properties.

Mid-year review:
According to the latest CoreLogic report, in the first quarter of 2024 there were 1 million homeowners who have loan balances that exceed the value of their homes, an improvement of 200K from the same period in 2023. Home values remain well-supported in the aggregate, but there are some metros where that support seems to be flagging a bit, at least when comparing the latest available home value data. However, as this data still only covers transactions through the first quarter of 2024, it's too soon to make any full-year comparisons.

Still, with that in mind, HSH's Home Value Tracker (powered by data from the FHFA that covers 405 metro areas) showed 27 of them with lower aggregate values in the first quarter of 2024 when compared against the same period a year ago. While this doesn't mean that folks who purchased a home in back in 1Q23 are already underwater -- values would first need to soften up enough as to erode any downpayment they made for that to occur -- it's certainly not a step in the right direction.

Also through the first quarter, the National Association of Realtors also found lower year-over-year home prices in 15 of the 222 metro areas on which they report.

With only 25% of the year's data to review so far, it looks as though our forecast remains on track. Of course, it won't be until the next Outlook is due until we get a far more complete picture.

Home Equity / Cash-out refinancing

Even with some markets showing softer home values compared to a year ago, the vast, vast majority of homeowners have deep or very deep equity stakes. That's true even a place like the Austin-Round Rock-Georgetown TX metro area, where values were 7.7% lower in the third quarter of 2023 compared to the same period last year. Even factoring for the near-term dip, home values in this market are still about 44% higher than they were three years ago and still more than 8% higher than just two years ago. Many smaller and mid-size metro areas are still seeing very strong price gains, too, with high-single-digit annual increases seen in places like Hartford CT, Milwaukee WI, and Cincinnati OH.

While typical homeowners may have a deep equity stake, borrowing that equity isn't all that attractive, largely due to high interest rates. Home equity lines of credit are typically priced at about two percentage points above the prime rate, putting HELOC pricing for typical borrowers at about 10.5%, more than a 20-year high. Still, Federal Reserve data shows that through the third quarter of 2023, growth in home equity lines of credit managed to increase 2.8%, about $9.568 billion in new borrowing. Since interest rates were on the rise throughout that period, borrowing on fixed-rate home equity loans was somewhat more appealing, and these installment-type second mortgages managed a 5.4% rise in activity, with $25.131 billion in new originations by homeowners.

With first mortgage rates likely to ease somewhat, it's certainly possible that some potential equity borrowers will turn to a cash-put refinance to access their equity stake, but for homeowners with existing mortgage rates in the threes and fours this won't be an especially attractive or viable angle. With market-based interest rates and the Fed-following prime rate likely to be a bit lower next year, there's a good chance that more homeowners will instead turn to home equity lines and loans to tap equity.

Since we're reckoning for 2024, we think we'll see a 4% increase in originations of home equity lines of credit and perhaps a 7% increase in those of home equity loans. Rates still won't be all that attractive, but for most homeowners it will be more favorable to expose a relatively small dollar amount to them in a draw of home equity via a loan or line than it will be to take a new mortgage with both a higher loan balance and a higher interest rate.

At the same time, cash-out refinancing should see a little boost as mortgage rates improve, but even in an improved interest rate climate, they won't be low enough for most homeowners to want to replace what is likely an existing lower-rate loan with a new one at a higher rate.

Certainly, there can be situations where such an exchange will work. Borrowers with old loans that have very small existing balances could be one audience, but there likely aren't many homeowners that will fit this category. Perhaps the primary audience will be borrowers looking to tap equity to spruce up their homes in preparation for a sale in the next year or two. Yes, the new loan's interest rate will likely be higher than their existing loan, and yes, the loan balance will be higher, but restarting the amortization clock all over again does help ameliorate the impact of these to a degree... and, by comparison, taking out a home equity loan or line of credit instead still brings the potential for a higher monthly payment for the two mortgages combined.

In a short time-frame situation, the long-term effects of higher interest cost don't really come into consideration, as it's more about current cash flow as opposed to long-term costs. As an example...

A homeowner who took a 5.25% 30-year loan back in May 2022 for $300,000 would have a principal and interest payment of $1657, and by May 2024, will have a remaining loan balance of about $291,000.

A cash-out refinance with a $24,000 equity draw (loan balance $315,000) at 6.25% produces a monthly P&I payment of $1940, so this would be a $283/month increase.

Taking a home equity loan of $24,000 for 10 years at a rate of 9% brings a monthly payment of $304, so the cash-out refi would cost about $21 per month less than the equity loan (to make the payments roughly equivalent requires a home equity loan rate of about 7.375%).

This is only an example to show what's possible, of course, but it does at least suggest that some homeowners will look to do cash-out refinances this year. All that said, refinancing activity overall will remain quite muted -- rate and term refinances will likely be attractive only for recent (e.g. 2024 vintage) homebuyers, while cash-out refinances should pick up just a little for existing homeowners who don't have long-term plans to stay in their current home.

Freddie Mac noted back in August that in the first half of 2023, nearly nine out of ten conventional refinance originations were cash-out refinances. While this may sound like the old "house as an ATM" days, the reality is that it simply shows how few traditional rate-and-term refinances were taking place as rates continued their rise in 2023. That rise in rates apparently peaked in late October; even with considering their recent retreat, mortgage rates still remain well above even early 2023 levels (let alone the far lower rates of recent years), so there's little reason to expect a surge in cash-out refinancing. That said, if rates should decline further from present levels in 2024 as expected, activity for both traditional and cash-out refinances should improve, at least somewhat.

Mid-year review:
Equity extraction has been a bit sluggish this year, as high interest rates for either first or second-lien financing remains high. At least according to data from the Federal Reserve (gathered solely from banks) there was 3.67% growth in home equity loan balances through the first quarter of 2024 when measured against third quarter 2023 levels, the latest available reference point when we wrote the Outlook six months ago. As such, home equity loan originations are running rather below our expectation, at least to start the year.

Growth in balances on HELOCs are a bit closer to our forecast, where we called for a 4% increase. At least over the last two quarters, HELOC growth has run a 3.29% pace, so pretty close, at least in an interim review.

With first mortgage rates already elevated to start the year, and higher through much of the first half of it, it goes without saying that refinance activity has been damped. At least according to the Mortgage Bankers Association weekly applications survey, refinance activity in the week of June 19 was about 24% below the peak level of the year (mid-January), not that activity was all that robust back then.

Still, it's a reasonable bet that the fairly few homeowners who are refinancing aren't doing so to try to lower their interest rate. Data from the FHFA (conforming mortgage originations) showed that 70% of refinance activity in March was for cash-out reasons, so while the number of homeowners refinancing is slight, the vast majority of those refinancing are looking to get access to their home equity.

If first mortgage rates decline later in the year, as is generally expected, there may be some pickup in overall refinancing activity, including cash out. That said, until mortgage rates decline meaningfully -- down into the low 6% / high 5% range -- refinancing still won't have a strong draw, so we would expect to seen continued leaning on Home Equity Loans and Lines of Credit for a time yet.

Reverse Mortgages

High interest rates didn't only crush activity in forward mortgage markets, they also significantly curtailed action in reverse mortgage markets, too. When reverse mortgage rates were low in 2021 and 2022, many homeowners with existing HECMs took the opportunity to refinance, taking advantage of both higher property values (expanding the amount of equity they could access) and increased homeowner ages (same) all with the chance to meaningfully lower the amount of accrued interest these loans would accumulate, leaving more equity available in the future.

For fiscal year 2023 (ending September 2023), HUD backed just 32,963 HECMs, a decline of 48.9% compared to FY2022. The annual report to Congress regarding the state of the FHA's Mutual Mortgage Insurance Fund (MMIF) noted that HECM-to-HECM refinance endorsements have declined from over 50 percent of all HECM originations in 1Q22 to just 10 percent of volume during the third quarter of FY 2023. For all of FY23, we reckon that HECM refinances dropped from 50% of all HECM activity to perhaps 14% for all of 2023... and as noted, that activity was dwindling further as interest rates moved higher in fall of 2023.

Higher rates simply left no reason for most homeowners to bother to refinance their HECMs, but they also seemed to even damp originations for "traditional" uses, too. Endorsements for traditional HECMs fell from 33,236 in FY2022 to 26,917 in FY23, a 19% decline. As will, since these rates were both less favorable -- and homebuying conditions still very challenging -- even the use of an HECM to purchase a next home was impacted, with the use of a HECM for this purpose declining by about 9% in FHA's last fiscal year.

Although interest rates for HECMs will eventually decline along with other market-based interest rates, they haven't yet. Even when they do, even as much as a full-point decline won't leave them much better than where they started 2023, so there's little reason to expect a significant increase in HECM activity in 2024. At best, we might see a 5% or so increase in HECM endorsements in 2024, with all of the growth likely coming from the "traditional" sector -- but perhaps a little "HECM for purchase" pickup, too.

Mid-year review:
With home values both elevated and well supported, we expected that senior homeowners would be looking to take advantage of deep equity positions and free up funds with no repayment obligations. At least so far this year, that hasn't happened, most likely due to unfavorable interest rate conditions.

High interest rates for HECMs has crushed activity, at least so far in 2024. HECM to HECM refinancing -- a means of both getting a lower accruing interest rate and expanding the dollars available to a homeowner -- has dried up nearly completely, managing to be just 9.2% of originations in April. With fixed interest rates even higher, most HECMs being originated carry adjustable rates, but even those are running in the high 6% to low 7% range. As any homeowner knows, rates this high can accumulate interest charges pretty quickly, and so this may be giving pause to seniors looking to tap equity.

By way of reference, "traditional" HECM originations make up more than 85% of the market, with "HECM for purchase" managing just a 5.6% share.

At least so far in 2024, and comparing the trend from the third quarter of last year, originations of HECMs through the first quarter of 2024 are running about 16.4% below the pace they ran in the third quarter of 2023. All in all, we are so far missing the mark for our forecast here by a wide margin.

Home prices

Last year at this time, we were among the few who believed that existing home prices would be well supported in 2023, and they came off their seasonal lows to reach their second highest median level ever in June 2023 (June 2022 is still #1).

As we write this, there has been fewer seasonal decline in home prices than normal -- just 19 of the top 50 metro saw median home prices decline (compared to the second quarter). A year ago, this was 41 of 50 markets, and outside of two very distorted pandemic years (2020, 2021), price declines in 26 markets (50+%) is more typical in each year's third quarter, with the fourth quarter of each year usually the cyclical valley for home prices. With the downtrend for mortgage rates and fewer softer markets coming into the period, it seems likely that the seasonal dip may be shallower and less broad than usual to close 2023.

As far as seasonality goes, from 2022's June peak of $413,800, median existing home prices declined to $361,2000 by January of 2023, a 12.7% decline. This year, the peak for home values was $410,000 in June, and if the same decline should occur, the bottom for median home sale prices would occur in January at $357,930 -- but late 2023, declines in mortgage rates may firm up demand for homes through the holidays, tempering the seasonal price decline somewhat, allowing 2024 prices to start the year from a higher seasonal bottom.

With mortgage rates down from peak levels, at least some additional demand will likely spill into the housing market early in the year, and probably before the "spring homebuying season" gets underway. This will be the re-engagement of potential homebuyers who moved to the sidelines during the summer-fall spike in mortgage rates being added to those folks who have remained in the market despite summer and fall 2023's challenging conditions. Not that home prices are likely to seasonally sag all that far this year, but any fresh demand for homes will likely firm them up again, as there will still be too few homes available to meet demand.

The lack of homes available to buy -- caused by a combination of factors, and not just the so-called "lock-in effect" of homeowners reluctant to give up mortgages with rock-bottom rates -- isn't likely to change dramatically, but it may start to improve a little. A least some homeowners with a deep equity stake may be able to make a move with less effect on their monthly payment, and folks who have needed more or different space maybe more motivated this year after struggling through 2023.

We think existing home prices will be very well supported again in 2024, as the housing market only takes small steps toward normalizing. It would not surprise us at all to see a new record high home price at the typical seasonal peak in June, but overall for the year, existing home price increases probably run in the 2.5% - 3% range on average across markets.

Prices for new homes have been telling a rather different tale. Improved supply chains, lower lumber prices and worker shortages that have begun to ease have helped prices to settle, and builders have been using price cuts and financing incentives to help keep homes selling. The median price of a new home sold has become more competitive with median existing home prices, and in November 2023, the median price of a new home sold was $434,700 versus $387,600 for an existing home. Where prices of existing homes have been sticky and stubbornly high, those for new homes have fallen considerably, and the price of a new home sold in November 2023 was actually 6% below the same month in 2022.

The new construction market doesn't suffer from the same kind of supply issues as does the existing home market. In fact, the supply of new homes available to buy is very good at the moment, with about 9.2 months of supply at the current rate of sale through November 2023. The actual number of new homes available to buy is only a bit thinner this year than last, with 451,000 (annualized) units available for sale, down from November 2022's 455,000 units. Like the existing housing market, the improvement in the inventory-to-sales ratio has largely come from flagging buyer demand amid the current high-rate climate. Regardless, there are still more than enough new homes available to satisfy demand, even if it strengthens.

While that's good news for potential homebuyers, it doesn't mean that new homes are a substitute for a better-balanced existing home market. It also seems likely that prices for new homes can't really decline much more from present levels, either. Prior to the pandemic, median new home prices routinely ran in the $320,000 - $340,000 range; the last time we saw this moderate price level was more than three years ago in August 2020, but due to pandemic disruptions and distortions, prices of new homes rose 52.7% to their all-time peak before in September 2022 before beginning their recent retreat.

While there will be typical fluctuations in seasonal demand that influence new home prices, we think that the overall trend for them for 2024 will be essentially flat compared to where we are at the moment, but when comparing the average for all of 2024 against all of 2023, we may end up seeing a slight decline of perhaps 2% - 4% for the year.

Mid-year review:
As we write this, we of course don't yet have a complete first-half of 2024 set of data to go by, since existing home sales through May is the latest available information. Even so, our outlook has so far been right and wrong; right in that we expected to see existing home prices be well supported, but wrong in that we (so far) have underestimated the strength of that support. As referenced against the same month a year ago, the median sales price of an existing home has not seen an increase less than 4.7% this year, and price increases are in fact averaging more than 5% over the first five months of 2024, a figure well above the increase we expected to see.

We thought there was a good chance we'd see a new record high for existing home prices come June when the seasonal peak for prices typically occurs. As it turns out, a new record median home price of $419,300 was actually set in May, and there's a good likelihood that another new peak will come again in June. After that, normal seasonal softening in home prices should show, if history is any guide. That said, we've undershot the mark for existing home prices so far, but we will probably be at least somewhat closer to it when all is said and done for 2024.

For new home prices in 2024, the reverse is turning out to be true so far; that is, our expectation has overshot the mark. We expected prices for new homes to creep 2% - 4% lower in 2024, but so far, they are actually only somewhat lower on balance. The average median sales price of a brand-new home for all of 2023 was $425,383; with five months in the books so far this year, this figure is virtually unchanged at $424,700. As well, a head-to-head, first five months of last year versus the same five-month period this year sees about a half percentage point increase in new home costs. Amid sluggish conditions, builders continue to use pricing incentives to help attract potential buyers, while buyers are also seeking out homes in the lower price echelons -- about half of new home sales in May were priced below $400,000.

There's still a lot of year yet to go, and while our expectations for home prices aren't quite being met so far, we still think there's a good chance we'll be at least closer when the end of the year comes rolling around.

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

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