Economists who follow the mortgage industry say originations will continue to sink in 1995, possibly by as much as 20%, to between $600 billion and $650 billion.
But for an expected increase in home prices, the drop in dollar volume would be even larger, they say.
The Federal Reserve's six interest rate increases took a toll on originations starting in February, they say, and the damage will continue next year.
Robert Van Order, chief economist at the Federal Home Loan Mortgage Corp., expects housing prices to rise even faster than inflation. Housing costs will rise about 4.5% in 1995, he said, in comparison to a 3% rise in living costs generally.
At the end of 1994, mortgage originations will have reached $750 billion, he said, and in 1995, the business will decrease to $600 billion, a drop of 20%.
"It's the absence of the refi boom," Mr. Van Order explained. "Next year, interest rates will be up to 9% to 9.5% for most of the year," he predicted.
Joseph Hu, director of mortgage research at Oppenheimer & Co., said he expects mortgage originations in 1995 to decline to about $650 billion, from his low-ball estimate of $685 billion this year.
"High mortgage rates will modestly weaken the housing activity," Mr. Hu said. "There will be some-where around a 10% decline in sales of existing homes and housing starts." But, he said, he expects a 3% increase in housing prices.
Mr. Hu compiles his own figures for originations rather than using those of the Department of Housing and Urban Development. His figure for this year, $685 billion, is significantly lower than the number used by other economists, who generally agree on $750 million.
Mr. Hu thinks mortgage interest rates will average 9.25% next year. Mortgages with interest rates of 9% and lower will not be refinanced, and those loans account for 80% of the total, he said.
David Berson, chief economist at the Federal National Mortgage Association, also predicted a further decrease in mortgage originations, to $630 billion in 1995 from $750 billion this year.
"I expect home sales to go down 4% next year," Mr. Berson said, "and home prices should go up 4 to 4.5%." He also said the loan-to-value ratio will continue to edge up in 1995, as it did this year.
"In 1991, there were $560 billion of originations, so we're still well above what it's been in the past," Mr. Berson said. "It's still a substantial decline from where we've been, but historically, it is pretty good."
David Lereah, chief economist at the Mortgage Bankers Association, said he expects refinancings to make up 11% of the business next year. "It never dries up completely, it never goes away," he said.
He expects 1995 to produce $600 billion of originations and said he will be looking for rising interest rates.
"The Fed will be in two or three more times, and rates will go up to 10% for the 30-year rate by the third quarter," he said. "As a consequence, housing starts will be down 7%; existing-home sales will be down 5.5%; and newhome sales will be down 9%."
Early next year, Mr. Lereah projected, adjustable-rate mortgages of all types will be popular. But as the difference shrinks between adjustable- and fixed-rate loans, fixed-rate products will gain ground.
Larry Swedroe, vice chairman of Residential Service Corporation of America, St. Louis, predicted: "We are likely to see further rises in short-term rates into the second quarter. This continued tightening will have two effects: It will continue to depress refinance activity, and the flattening of the yield curve will dramatically raise ARM prices."
Pulse of the Market
1-Year ARMs Average Average rate pointsAtlanta 6.73% + 1.16Baltimore 6.53 + 1.78Charlotte, N.C. 6.60 + 7.48Chicago 7.03 + 0.81Cleveland 7.09 + 0.69Dallas 7.03 + 0.84D.C. metro 6.57 + 1.67Denver 7.14 + 1.26Detroit 7.07 + 0.55Los Angeles 7.06 + 1.36Miami 6.95 + 1.07Minneapolis 6.85 + 1.53New York City 6.17 + 1.60Phoenix 7.00 + 1.28San Francisco 7.14 + 1.36Seattle 7.03 + 1.65St. Louis 7.14 + 0.39