Experts agree that 2018 is going to be good – but not as good as last year – for the mortgage business nationwide, leaving Massachusetts lenders and originators to compete even harder for fewer residential loans.

The Mortgage Bankers Association (MBA) projected total U.S. mortgage originations to decrease from about $1.7 trillion in 2017 to $1.6 trillion in 2018. While the number of purchase mortgages is expected to increase in 2018, it will be offset by much lower refinancing activity due to what are expected to be modest increases in interest rates.

The MBA’s chief economist Michael Fratantoni predicts mortgage rates will rise slightly, but remain below 5 percent in 2018. That’s enough to cut refinancing activity way back, but it isn’t expected to put enough downward pressure on prices to offset the upward pressure created by historically low inventory levels.

Inventory is the Story

During the first week in January, there were just 11,225 homes on the market in Massachusetts, according to MLS data. That’s the smallest inventory since 1995, when MLS began tracking inventory levels, and it’s been falling for years. Despite low inventory, nearly 60,700 single-family homes sold in Massachusetts last year, according to analysis from The Warren Group, publisher of Banker & Tradesman.

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The shrinking supply is driving faster sales and rising prices. Frustrated buyers are snapping up houses as soon as they come on the market, making bidding wars common in many markets. That’s only going to get worse in Massachusetts, according to Javier Vivas, director of economic research for Realtor.com.

“We don’t think 2018 is going to be any different than it has been in 12 to 18 months,” Vivas said. “This particularly effects the first-time homebuyers. Boston is the fastest-moving market in the Northeast, and it’s moving faster with time. It still has some room to grow in the price department. The market isn’t saying, ‘we’ve had enough.’ It’s the result of a strong economy. In Boston, buyers have a second wind.”

To predict what will happen in Boston, one need only look at what has happened in the San Francisco market, said George Ratiu, managing director of housing and commercial research for the National Association of Realtors (NAR).

“They’re both job centers constrained by water on one side,” Ratiu said. “You have a supply constraint being met by a confluence of positive factors and higher demand. In the short term, there’s nowhere for prices to go but up. What’s interesting to me is, even in places like Springfield, prices were up close to 4 percent, they’re up 3 percent in Pittsfield and close to 6.5 percent in Worcester.”

Ratiu’s figures are per NAR’s data analysis. The Warren Group’s analysis shows a 6 percent increase in the median sale price of a single-family home in Springfield for 2017 and 9 percent increase in Worcester; Pittsfield’s median sale price was unchanged at $160,000.

Homeowners who locked their mortgage rate in a 3.5 or 4 percent are less likely to move now that rates are increasing, Ratiu said.

“With the historically low mortgage rates, a lot of people have locked in low rates and they are going to be slow to move,” he said. “Now rates and prices are both higher than when they bought. The average tenure in a home used to be seven years; now it’s 10. It could go even higher.”

Boston is in such high demand, it made Redfin’s Top 10 Migration Destinations in November 2017. It had the sixth highest number of new residents of any metro in the country, increasing demand for housing. Most of those new residents came from New York City, according to the report.

The recent changes to federal tax law could put even more downward pressure on inventory, Vivas said.

“We think tax benefits (homeowners’ ability to deduct state and local taxes on their federal return) being removed will making it harder for existing owners to have a compelling reason to sell,” he said. “We’ll potentially see a more delineated slowdown in sales. It will hurt mobility.”

Since overall mortgage volume is expected to decrease in 2018, Kurt Noyce, president of Embrace Home Loans, said the already competitive residential mortgage market will get even more competitive. His company closed about $1 billion in loans in Massachusetts in 2017.

“You’re going to see single-digit home sales price appreciation,” he said, “but you’re going to see more than single-digit declines in the number of purchases. And that’s going to be more problematic for lenders who aren’t as competitive.”

Lenders won’t be able to rely on referrals to meet production goals, he said; they’ll have to find ways to market directly to prospects or partner with other institutions. In the last three years, Embrace has entered partnerships with Rockland Bank and Eastern Bank. Embrace now handles all the work after a mortgage application is taken, freeing the banks to do what they do best.

“We’ve been able to close loans faster than they used to because that’s all we focus on,” Noyce said. “As refinancing subsides, to compete you are going to have to be at least as fast as the competition.”