Following rise in rates, refinance activity slows, at least for now
The refinance share of mortgage activity is at its lowest level in almost two years, according to the Mortgage Bankers Association’s weekly data released on Jan. 27. But the cash-out refinance market, which may be less sensitive to rising interest rates, may keep refinance activity alive this year.
“We have reason to believe refis are not going to fall off the face of the earth,” says Hamilton Fout, Fannie Mae’s director of economics, even with rising interest rates.
Refinance activity was 49.4 percent of total mortgage applications for the week ending Jan. 20, according to MBA, down from 50.0 percent the previous week. The percentage that week was the lowest since July 2015. MBA’s survey for this data covers more than 75 percent of all U.S. retail residential mortgage applications.
Fannie Mae’s Economic & Strategic Research (ESR) Group is forecasting that mortgage rates will rise gradually in 2017. They expect them to reach a fourth-quarter average of 4.3 percent.
“Interest rates have ticked up, but right now, we’re more in a wait-and-see mode,” Fout says, “until we see we’re out of this long-run cycle of declining rates.”
Equity in the Equation
Mortgage rates surged for eight straight weeks after the November elections. But their average level in 2016 was the lowest since Freddie Mac began tracking them in 1972, the ESR Group points out in its economic summary for January.
One of the factors that could boost interest rates is rising inflation, Fout says. According to ESR, the Federal Reserve will exercise caution, given “substantial” policy uncertainty in the U.S. Still, ESR anticipates two rate hikes this year. And the Fed could speed up rate hikes if they see enactment of fiscal stimulus.
Does this mean that refinance activity will completely disappear? Not necessarily when you consider the cash-out refinance market. While homeowners have little incentive to refinance into a higher rate, those who choose cash-out refinancing have another motivation: tapping equity.
“These homeowners may want to finance a child’s education or a home improvement, so they’re going to be less rate-sensitive,” Fout says. “Definitely, rates matter, but in terms of cash-out refinancing, home price growth matters too. People are trying to extract some equity.”
Slow Growth Ahead
Ellie Mae reported a drop in monthly refinance activity for December. It attributed the decline to rising rates. The 30-year note rate that month was 4.05 percent, up from 3.81 in November. Back in November, a low 30-year note rate “bolstered”the refinance market, according to Jonathan Corr, president and CEO of Ellie Mae. Homebuyers were trying to complete refinancing as rates began to rise, he explained.
“We believe that the strong refi market caused the increase in time to close in November. That’s a data point we’ll watch as the purchase market picks up in early 2017,” Corr said in December. (Ellie Mae’s data is a sampling of 75 percent of all applications in its mortgage management software services.)
Similarly, Fannie Mae Chief Economist Doug Duncan says, “We expect housing to remain resilient and continue its recovery in 2017, with affordability standing out as the industry’s greatest obstacle, particularly for first-time homeowners.”
Overall, mortgage applications decreased 3.2 percent for the week ending Jan. 27 compared to the prior week, according to MBA.
While refinance activity may tick down due to higher interest rates, lenders may see higher closing rates, according to Ellie Mae. In December, closing rates for all loans increased to 73.2 percent, according to Ellie Mae. That was their highest rate for all of 2016.
“As rates began to increase, we saw purchases tick back up in December, signaling the start of a trend we expect to continue into 2017,” Corr says. “We also saw closing rates rise to the highest percentage in 2016 as homebuyers locked in rates and lenders closed loans before the conclusion of the year.”
Estimates, forecasts, and other views expressed in this article should not be construed as indicating Fannie Mae’s expected results, are based on a number of assumptions, and may change without notice. How this information affects Fannie Mae will depend on many factors. Neither Fannie Mae nor its Economic & Strategic Research (ESR) Group guarantees that the information in this article is accurate, current, or suitable for any particular purpose. Changes in the assumptions or underlying information could produce materially different results. The ESR Group’s views expressed in this article speak only as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.