With the new year soon upon us, here’s our take on what will be making economic news next year.
For one, economic growth just needs to last seven more months to set the record for the longest expansion in U.S. history, based on business cycle dates going back more than 160 years. We anticipate economic growth will be about 2.4 percent during 2019, a bit slower than the 3.1 percent we expect for 2018 but sufficient to push the unemployment rate to about 3.4 percent. This would mark the lowest unemployment rate in 50 years.
The good news on employment and growth leads to our next projection for 2019: higher interest rates. The Federal Reserve will continue to keep an eye on inflation while pursuing its goal of normalizing the level of interest rates. We expect long-term yields to rise as well, nudging 30-year fixed mortgage rates up to an average of about 5.25 percent by next December, the highest in a decade. (Figure 1)
Higher interest rates will affect housing and mortgage market activity. At the margin, homeowners who currently have low-rate mortgages will be incented to stay in their home rather than sell, keeping the new-listings flow relatively low. The larger monthly payments that come with higher mortgage rates will likely soften buyer demand, leading to less pressure on home prices. For our national CoreLogic Home Price Index, we forecast price growth to slow by one percentage point over the next 12 months. (Figure 2)
For mortgage lending, higher rates mean even less refinance in 2019. We expect the refinance share of originations to decline to about 25 percent, the lowest in 25 years. The dollar decline in refinance will be largely offset by the dollar increase in the home-purchase lending, keeping the overall dollar volume of originations about the same between 2018 and 2019. The growth in home-equity, and choice of homeowners to stay rather than sell, should increase home remodeling expenditures and the origination of HELOCs for home improvement purposes.
 The longest trough-to-peak cycle to date was the March 1991 to March 2001 expansion; see https://www.nber.org/cycles.html.
 Home Mortgage Disclosure Act data indicate that refinance comprised 23 percent of single-family originations from mid-1994 to mid-1995.
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