Mortgage refinancing has been a major factor in the Real Estate recovery these past 2 years. Most homeowners have taken advantage of historically low-interest rates through a rate and term refinance. Some have even shortened the length/term of their mortgage while maintaining a lower monthly payment.
When mortgage rates collapsed from the 5% level in early 2011 to the low of 3.25% last year, it created a series of serial refinances and Harp 2 borrowers who jumped on this historical economic event. Rates have moved back higher so far this year and many wonder if we have already seen the bottom (last year).
We hit the low point in the 10-year Treasury note yield last year after the Euro zone crisis spurred the 10-year note to break slightly under 1.4%. Unless we have another major financial catastrophe in the world some time soon, we have probably seen the low point in the yield of the 10-year treasury note. Thus, rates should be rising from now on. There will likely be some pull backs since the Fed is stilling buying mortgage-backed securities for 2013. There is some concern that we might get a spike in the 10-year treasury note. However, there seems to be just a “slight” possibility of a “spike” in rates. We are unlikely to be punished for our government debt load in 2013. Those consequences will more likely be coming a few years down the road.
Thus, the Mortgage Refinance boom appears to be over. Origination volume in 2012 was very high due to the historically low rates. We probably won’t see that type of mortgage loan volume again unless rates break under 3%. Even with the Fed promising to buy mortgage-backed securities, that lower break is unlikely to happen. If conventional conforming Mortgage rates get to 3.75% and stay above that range, the pool of available refinance candidates will be small from here on out.
There are still “some” people who are yet to refinance, but not nearly in the high numbers we saw last year. For 2013, refinance origination will clearly be lower but the real trouble could come in 2014. The Fed will likely call an end to mortgage-backed securities purchases, which will push rates toward the path of normalization, or more toward the 6% level years from now. The Fed has already expressed concern about their 3 trillion dollar balance sheet. And that balance sheet will be more than “4” trillion dollars in less than a year. By the middle of 2014, the Fed is likely to be raising short term rates.
Consider the following potential future effect of all these low mortgage rates captured by American homeowners:
There are many homeowners who have locked in very low (cheap) money for 30 years. Down the road, if they want to move by first selling their home, they would lose that inexpensive mortgage and would likely be looking at a much higher interest rate for their next home. Unless home prices have dropped dramatically, or they are scaling way down in size, their monthly payment will rise, probably substantially. This would have a major affect on their decision to move or not. Would some decide to hold onto their first house and turn it into a rental, while buying another home? It’s not easy to rent a home and qualify for another mortgage on top of that, as well as coming up with the liquid assets needed for a down payment without selling your existing home.
So, years out there will be many Americans thinking about this problematic situation. Some may not even qualify for a mortgage when rates normalize to 6% or higher. In the short run, this recent refinance boom has certainly brought disposable income into the hands of those who could refinance. This extra disposable income may have helped the consumer economy a bit. It has also made home buying much more affordable. However, perhaps the overall state of the housing market has not actually changed. Perhaps the core problem in housing is still with us. We don’t have enough qualified home buyers to cause a “natural” rise in prices or expansion of homeowners (excluding cash buyers). Until we get real/natural positive changes in our economy (more job growth, higher incomes, better liquid asset profiles for first time and traditional home buyers, etc), we may be in the same boat we were in before interest rates started to plunge in 2011.