Where are interest rates headed and what is the current state of the housing market? NFM TV sat down with Mortgage Bankers Association Chief Economist Mike Fratantoni to get his take.

Full Transcript is Below:

– Our forecast, you can remember back in October we thought, okay, first cut in May. I think the market’s getting there and the FOMC signaling that’s what they’d like to do. Three cuts this year, four next year. That holds us to our, you know, long end of the curve forecast where we’ve been, you know, where we’re at six and three quarters to seven today on a 30-year mortgage rate. We think we’ll be at 6 by the end of the year, 5 1/2 next year.

– My goodness, I love when you come out swinging like that, Mike. Can you make some sense of the contradictory data that’s out there? I mean, because there’s a lot of it, right? We’ve got consumer spending ebbing lower, you’ve got consumer savings much, much lower, you have credit card debt all time highs, yet we’re being told inflation is still a problem.

– So, you know, the January CPI data, you know, people are pointed to some technical issues why the seasonal adjustment may be off, and it’s really, we’re not getting as much signal as noise there. You look inside of that number, again, the one that’s really a puzzle for us is it’s still showing shelter costs going up 6% a year at a time when rents are dropping in many major markets across the country. So the lag between that sort of market data on asking rents and the rent rule to the BLS is just, it’s much longer than anybody had guessed. But I think the flip side of that is it could drop like a rock here sometime soon- that shelter component. That’s 40% of core CPI, right? It’s a smaller component of the PCE measure, which is really the favorite of the Feds. But regardless, there’s gonna be a lot of downward pressure on inflation here not too long coming from the shelter component. The rest of it, yeah, again, the job market’s stronger than anybody who guessed, which is good news for a home buyer, right? Their income’s higher than they would’ve thought, and more confident about their financial situation. But it is putting a little bit of upward pressure on services costs.

– Mike, let’s talk about production levels for 2024. Where do you have us ending up as an industry and have you had to adjust?

– Just adjusting around the edges. We’re still thinking a little over 2 trillion in 2024. So that’s up about 22% from the 1.6 trillion in ’23. And really the best news, and I’d be curious if you’re seeing the same thing, is almost every lender I talk to is saying they are getting a lot of demand for prequals, but obviously the deals aren’t closing yet ’cause inventory is still tight, but the demand is there, even with the hint of rates going a little bit lower. Then we put out a number just end of last week – applications to buy a newly constructed home up 19% compared to last year. So that’s obviously been the real sweet spot of the market is new construction.

– Yeah, so do you expect that to continue when we come out of this malaise, that new construction is gonna be all the rage? Or do you think that’ll come down to more historic levels? I mean, historically, new construction represents around 10% of the inventory on the market. It’s been well above 30 for some time now.

– No, I think that’s gonna be the world we live in the next couple of years just because we under-built for so long. And then we still have, again, the very favorable demographics coming from the millennial cohort and that’s gonna support the demand for years. I think, you know, next five, six years at least,.

– That 2 trillion projection you have, does that include refinances or is that strictly purchases?

– That includes refinances, so, you know, you’ll see the headlines for more forecast of, you know, refinance up 50% in 2024, but remember it was like a drop in the bucket last year. So this year will be two drops, but it really is not a lot of volume but more than last year.

– Mike, give us an idea of where we are inventory-wise and when it’s gonna return to some kind of normalization. Will it get back to six months, which I think is sort of the high watermark we’re accustomed to?

– Yeah, again, on the new home side, builders are picking up the pace, permits are strong, you know, north of a million. We’ve got seven plus months of new home supply, but that really is only about a sixth of the total market, with existing side, we still got, you know, 3, 3 1/2. The high frequency data you’re seeing from, you know, folks like Redfin, others, are saying week to week inventory’s coming up even above and beyond what you would expect in a typical seasonal pattern. So I think you have sellers that have put off selling last year, put off selling the year before, they have to move, right? The house isn’t working for ’em anymore. So I expect everything’s gonna go up, but we’re still gonna be tight. So I mean, the way to look at our forecast to see that, we still see home prices going up, you know, going up 3, 4% per year the next couple of years.

– So the headlines from this latest chat with you is you feel pretty confident, obviously subject to change, that by the end of the year we’ll be around 6%, and next year we, in all likelihood, we’ll be in the 5 1/2% range at some point.

– That’s where we are, yes.

– Michael Fratantoni, you’ve got a hard job, my friend. I mean this has been such a challenging runway here over the last 36 months. Really appreciate you sticking to it and always giving us time here on NFM TV .

– Mike, thanks.

– Thanks, Greg. Appreciate the opportunity.

– All right, we’ll catch up again in a few months. Thanks so much.