The mortgage refinance boom that was spurred by the pandemic may have come to an end, but its effects are expected to be long-lasting.
In the first quarter of this year, mortgage balances saw a modest increase of $121 billion, marking the smallest gain since 2021. This can be attributed to a decrease in new loans, with mortgage originations hitting a low of about $324 billion—the lowest figure seen since 2014, as reported by the New York Fed and Equifax data.
This quarterly report serves as a reflection of the frenzied housing market during the height of the pandemic. Plunging mortgage rates led to intense competition in the housing market, resulting in a surge in refinance volume. In fact, during the earlier stages of the pandemic, the volume of quarterly mortgage originations surpassed $1 trillion for the first time since 2003, according to data from the Federal Reserve.
Over the course of the seven quarters of the refinance boom, homeowners took advantage of favorable mortgage rates and refinanced approximately one-third of their outstanding mortgage balances. Consequently, they were able to extract a staggering $430 billion in home equity through cash-out refinances, as highlighted in a recent report led by Andrew Haughwoud and his team.
While Haughwoud acknowledges the end of the refinance boom, he believes that its impact will continue to be felt for many years to come. In his statement as the director of household and public policy research at the New York Fed, he emphasized that the effects are far from over.
The low mortgage rates prompted homeowners to leverage cash-out refinances, allowing them to free up funds for other purposes. With about 14 million mortgages being refinanced during this boom period—from the second quarter of 2020 through the fourth quarter of 2021—borrowers were able to reduce their annual payments by tens of billions of dollars. This, in turn, provided them with additional resources for spending or paying down other debts.
Although the mortgage refinance boom may have ended, its ramifications are expected to persist well into the future, shaping the landscape of the housing market for decades to come.
The Decline of Refinancing: Higher Mortgage Rates Impact the Market
The latest data from the Mortgage Bankers Association reveals that the refinance boom has come to an end, and experts suggest that it may not return anytime soon. The industry forecast predicts that refinance originations will reach approximately $432 billion this year, a significant drop from 2022’s $667 billion and 2021’s $2.6 trillion.
According to Zillow senior economist, Jeff Tucker, the current cost of credit is quite high. Tucker believes that refinancing activity will resume when mortgage rates fall to around 5% or 5.5%, allowing recent buyers to take advantage of better rates. However, he doesn’t anticipate this happening within the year.
The limited selection of homes available on the market today can be attributed, in part, to the surge in refinancing during the pandemic. As mortgage rates increased from their record lows earlier in the pandemic and home prices skyrocketed, many homeowners became reluctant to sell. This trend, known as the mortgage rate lock-in effect, has contributed to a decrease in new home listings this spring and a boost in builder confidence.
The National Association of Home Builders reports that rising rates are one of the key factors behind the current shortage of new home listings. Alicia Huey, the trade group’s chairman, notes that low mortgage rates have made homeowners less likely to sell their properties, resulting in a greater reliance on new-home construction.
Interestingly, the New York Fed researchers suggest that cash-out refinances and savings from lower mortgage rates could potentially drive consumer spending. Homeowners who tap into their home equity often use the funds for significant purchases like home renovations. During the boom, borrowers withdrew an average of $82,000 from their home equity.
While some of this spending is still anticipated, researchers believe that the improved cash flow generated by the recent refinancing surge has the potential to provide significant support to future consumption.
In conclusion, higher mortgage rates have put an end to the refinance boom, impacting market dynamics. The decline in refinance originations may persist as rates remain high, and experts are not expecting a significant resurgence in activity anytime soon.