The bearish sentiment that has unexpectedly prevailed in the bond market since early February has driven mortgage rates up. Sharply higher rates will significantly reduce this year's originations of single-family mortgages.

We now project that 1994 originations will total around $675 billion, a plunge of $450 billion from the record volume of 1993. The projected sizable drop will come entirely from the subsidence in refinancing.

We believe that, for the remainder of this year, housing activity will maintain strength under current mortgage rates, which are still low by historical standards. Further, the pent-up demand for housing and rising consumer confidence will provide support to the housing market.

Home Sales Seen Firm

For 1994, single-family housing starts and sales of existing homes are expected to be marginally lower, at 1.08 million and 3.7 million units, respectively.

In dollar volume of originations, however, the marginal drop in units will be made up by the 4% increase in home prices. Originations of loans for home purchases will be just under $500 billion, virtually the same as last year.

Early this year, we estimated that single-family mortgage originations totaled $1.09 trillion in 1993 and projected that originations would drop in 1994 to around $890 billion.

In late March, the Department of Housing and Urban Development reported that originations amounted to $1.01 trillion in 1993. But most private market estimates believed that the HUD figure is a bit low because its fourth-quarter originations number was unexpectedly smaller than in the third quarter.

Based on a number of published data of housing activity, pass-through issuance and prepayments from various other sources, we have revised our 1993 estimate to $1.127 trillion. Using the same method for the estimate, we project the 1994 originations. We use our estimate for 1993 in this report so that it is consistent and directly comparable to the 1994 projection.

Drop in Refis

Refinancing that has been rampant over the past two years will subside in 1994 for two reasons.

First, the outstanding volume of "refinanceable" high-rate mortgages has been substantially depleted by refinancing. Going forward, refinancing will subside even if mortgage rates remain unchanged, let alone rise.

Keeping Up

Second, the sharp rise in mortgage rates has rendered those lower-rate (7.5$ to 8.5%) mortgages that would have been refinanced prior to the sharp rise in mortgage rates no longer refinanceable. Of the $677 billion in originations projected for 1994, only $180 billion, or 28%, will come from refinancing. Last year, refinancing amounted to $633 billion, or 56% of total originations.

We believe that home-purchase originations will be on par with last year's.

Housing activity will maintain strength because current mortgage rates are still quite low by historical standards.

Despite last year's steady declines in rates, housing activity rebounded belatedly in the second half due to the pessimistic consumer sentiment early in the year. Now with consumer confidence rising high, the housing industry should have little difficulty keeping up with last year's performance.

The effective demand for housing (the willingness and ability to purchase homes) will remain strong due to the pent-up demand from the 1990-92 housing downturn. And home prices are expected to rise about 4% this year.

We project net demand for mortgage credit -- originations minus refinancings and housing turnover -- for 1994 will be $201 billion, unchanged from the estimated $202 billion in 1993.

This net credit demand is fundamentally a housing phenomenon with more emphasis on newly produced housing units than existing homes.

Therefore, net credit demand is positively associated with the dollar value of single-family housing starts (average price of new homes times housing starts). The modest decline expected in housing starts for the remainder of this year will be made up by the rise in prices, leaving the projected net credit demand unchanged.

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