Home purchase mortgages are expected to outnumber refinances next year for the first time since the turn of the century, according to a new forecast from Freddie Mac.
Refinancing has dominated the mortgage market in recent years, often accounting for in excess of 80 percent of all loan applications as borrowers sought to take advantage of historically low mortgage rates. But refinance demand has fallen sharply as rates have risen over the past six months and Freddie Mac expects next year will be the first one dominated by purchase mortgages since 2000.
"With the close of 2013 will also come a major transition in the housing finance industry," said Freddie Mac chief economist Frank Nothaft. "For the first time since 2000, we're going to see the mortgage market dominated by purchase activity as the refinance share drops below 50 percent."
The rise in rates are expected to actually boost home sales next year, according to Nothaft, as recent sharp increases in home prices slow to a more moderate pace.
Rates expected to approach 5 percent
The forecast projects that mortgage rates will rise gradually throughout 2014, ending the year at close to 5 percent for a 30-year fixed-rate loan, although a decision by the Federal Reserve to scale back its bond-buying program could cause rates to spike.
Home sales are expected to increase by 5-6 percent over the coming year, per the forecast, although purchases will continue to be limited by a shortage of homes for sale, partly because many homeowners who would like to sell will still be underwater on their mortgages and unable to do so without taking a big loss.
New home construction is expected to pick up to an annual pace of 1.15 million units, up from 900,000 in 2013, but this is not expected to be enough to significantly ease tight inventories of homes for sale. Meanwhile, home prices are expected to continue to rise through 2014, but at an annual pace of 5-6 percent, compared to 10 percent in 2013.