Although the economy strengthened significantly throughout 2018, lackluster growth in wages deeply impacted mortgage lenders as rising rates pushed many Americans out of the housing market.
And while some experts predict 2019 will behave similarly, new data from Capital Economics suggests an oncoming economic slowdown will push the Federal Reserve to slash interest rates by 0.75% come 2020.
“With equity markets rebounding from their recent lows, economic growth solid, and core inflation close to 2%, we still think the Fed will raise rates once more, either at the April/May or June meeting,” Capital Economics writes. “Further ahead, however, we expect a sharp slowdown in economic growth will force the Fed to cut rates by 75bps in 2020.”
This could potentially be the boost the housing sector needs, as more and more lenders report declines in both origination and revenue volumes. However, rate reductions are often an indicator of a struggling economy, which also means consumer spending could weaken.
LendingTree Chief Economist Tendayi Kapfidze said the impact to mortgage lenders is hard to say because the short end of the curve won't tell you with consistency about the long end of the curve, which is what influences mortgage rates.
“If you go back to the last Fed cutting cycle from 2007 through 2009, you can see this,” Kapfidze continued. “Mortgage rates were down about 150 basis points but were very volatile in between and we’re not anywhere close to the 500 basis points decline in the Fed funds rate.”
“My best guess is that rates are more likely to be down than up, as the long end will be incorporating some of the same economic influences. Though really it could be up or down within a range of about 100 basis points,” Kapfidze concluded.
Keller Williams Chief Economist Ruben Gonzalez said when looking as far ahead as next year, the overall economic situation needs to be taken into consideration.
“This scenario would probably be a recession or heading into one. Mortgage rates may be lower in this scenario, but typically home sales will drop with consumer spending,” Gonzalez said. “We haven’t seen strong evidence this is likely just yet, but I would say we would likely see a steeper drop in home sales in 2020 if we get into a situation where the Federal Reserve is actively dropping rates.”
Furthermore, Gonzalez said when looking at a recession scenario, things like housing demand and credit availability tend to drop, meaning lower mortgage rates wouldn’t likely translate into any kind of increase in home sales.
“While right now we are watching leading indicators closely, we haven’t yet seen strong evidence that this kind of scenario is imminent,” Gonzalez said. “We think this year we will likely see sales declines in the single digits and slower price growth, probably closer to 3%. What happens in 2020 is largely going to be dictated by how the macroeconomic outlook changes over the year. Without a recession, we think home sales are likely to flatten out at a slower pace and price growth likely will as well.”
That being said, Capital Economics indicates this week’s Fed meeting will likely bring no changes to current rate levels, although rates could rise at least once more in the months preceding July. You can read more here.
