Money Bubble to Pop

mbp-4The organization that tracks the state of money in the U.S. more than any other when it comes to mortgages says they expect the money bubble to pop with mortgage originations to drop 32% in 2014 as refinancing dries up because of higher mortgage rates and slower home sales.

The Mortgage Bankers Association says mortgage origination volume will top $1.7-trillion this year, but fall to below $1.2 trillion next year. MBA chief economist Jay Brinkman is optimistic the economy will improve and the job market will grow, with gross domestic product expected to increase to 2.4%.

Unemployment and under-employment remain as the U.S. economy’s toughest obstacles to overcome, despite a decline in the unemployment rate to 7.2% in September. The rate, however, dropped as a result of fewer people looking for work full-time. Prior to last month there have been an average of 170,000 jobs created each month. Most economists say an average of 450,000 are needed for at least two years in order to stabilize the job market.

However, there are new signs that the economy is looking up, with mortgage applications posting a healthy increase last week, according to the MBA. Mortgage rates dropped to four month lows, driving more homeowners to refinance. The Refinance Index grew by 9% from the previous week as refinances made up 67% of mortgage applications, the highest share since June.

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The 30-year fixed rate mortgage averaged 4.33% on closed home loans, from 4.39% the prior week on 80% loan-to-value ratio mortgages. The decline in rates has been mainly driven by a drop in U.S. Treasuries, and a growing consensus that the Federal Reserve will not begin tapering the amount of securities it is purchasing each month until at least sometime next year. The Fed buys $85-billion worth of U.S. mortgage securities and Treasuries each month.

MBA economists expect job growth to be slow in the coming year, with unemployment to reach under 7% and get to below 6.5% in 2015, which is the figure that the Fed says it will begin raising its short term interest rates at.

Refinancing still makes up the majority of mortgage originations to get homeowners lower interest rates during the government driven money bubble, but that should start to change in the current quarter. The MBA projects refinances will make up less than half (48%) of home loan activity by the first quarter of 2014.