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How changing rates are affecting the mortgage market

November 15, 2018

Much has been made of the fact that mortgage rates are rising back toward pre-recession norms these days, continuing a trend that began in late 2016 - when rates were still near some of the lowest levels ever seen in the market. With that in mind, however, it's important for a range of people to consider what higher rates would mean for the mortgage lending sector. That includes those both thinking about getting a new mortgage in the near future (whether for a purchase or refinance) and people working within the lending industry itself.

The fact of the matter is that while rates have been rising for some time, it didn't really seem to have too great an impact on consumer demand for home loans nationwide. Buyers in particular were still keeping the market going strong even as refinances - which were the lifeblood of the industry in the aftermath of the Great Recession - have dwindled to a mere fraction of what they had been. However, as rates have continued to grow back toward the low end of the pre-recession range (about 5.5 percent), consumers seem to have increasingly taken note of how that would affect their long-term lending costs.

"Mortgage applications hit the lowest volume in almost four years."

Current trends
Indeed, in the week ending Nov. 2, there was a 4 percent drop in home loan filing activity from the previous week, as rates reached their highest level more than eight and a half years, according to the latest Weekly Mortgage Applications Survey from the Mortgage Bankers Association. This drop brought the total number of seasonally adjusted loan requests to the lowest volume in almost four years, with refinancing falling 3 percent and purchase requests dipping 5 percent.

As a result of these changes, the share of the market taken up by refinances ticked down very slightly, falling to 39.1 percent of all mortgage applications, from the previous week's 39.4 percent, the report said.

For would-be owners looking to buy, that decline brought activity to the lowest point in about two years, even as it was only down about 0.2 percent on an annual basis, the report said. However, it wasn't just mortgage rates that seemed to constrain potential buying activity, as more shoppers also seem to be held back by the low number of homes for sale nationwide.

"Rates increased slightly last week, as various job market indicators showed a bounce back in job gains and an acceleration in wage growth in October. The survey's 30-year fixed-rate, at 5.15 percent, was the highest since April 2010," said Joel Kan, MBA's associate vice president of economic and industry forecasts. "Application activity decreased over the week for both purchase and refinance applications, with the overall market index down to its lowest level since December 2014. The purchase index declined to its lowest level since November 2016, but remained only slightly below the same week a year ago. It's evident that housing inventory shortages continue to impact prospective homebuyers this fall."

Underlying trends
Just a few days later, it was revealed that mortgage rates for home loans backed by the government-sponsored entity Freddie Mac had climbed to the highest level seen in about seven years, according to the latest Primary Mortgage Market survey from Freddie. The average rate on 30-year fixed-rate mortgages (mostly used to finance home purchases) hit 4.94 percent, up from 4.83 percent just a week earlier, and seemed to largely be driven by an improving economy and higher employment.

Meanwhile, 15-year FRMs - which are often used in both purchases and refinances - climbed 4.33 percent from the previous week's 4.23 percent, Freddie's data showed.

Sam Khater, Freddie Mac's chief economist, remarked that these recent mortgage rate increases also led home prices to grow more slowly than they had prior to recent economic events. However, it's worth noting that even a decline in home price growth still leaves property values nationwide rising at almost double the historical average, which is likewise a potential issue for would-be buyers in many markets.

Moreover, Khater said that many of the markets where price growth is now slowing were those that were already overheated, such as California and Washington state; in those places, rates weren't just rising at double historical averages, but often much more than that, so the slowdown isn't as pronounced as one might expect. Indeed, quieter major markets - such as those in the Midwest and Rust Belt - are still seeing price growth pick up steam or only begin to flatten as rates keep rising.

"As recently as the 1990s, mortgage rates averaged 8.4%."

What does it mean?
While declining activity as mortgage rates hit 5 percent could be seen as a potentially big hurdle for the industry at large, that might not always be the case, according to Mark Fleming, the chief economist for First American Corp. It's believed that full-on, steady 5 percent rates are likely to arrive in early 2019 and stick around for some time to come, making that the new "floor" for mortgage affordability.

However, Fleming noted that while rates are certainly higher by half when compared with rates seen just two years ago, they are still quite affordable in comparison with what many previous generations of homeowners were likely to pay. The fact is that the housing market's meltdown more than a decade ago seems to have dramatically skewed consumers' perceptions of what constitutes high-level affordability. As recently as the 1990s, mortgage rates averaged 8.4 percent for the entire decade - after spending much of the '80s north of 10 percent - and only fell to less than 7 percent in 1998.

Rates didn't slip below 6 percent - a number many mortgage shoppers today might consider almost unfathomably high - until 2003. The all-time high-water mark for national average mortgage rate - seen during a recession in the early 1980s - is a whopping 18 percent, the report said. 

"Despite all the talk about rising mortgage rates, it's important to evaluate this in context," Fleming wrote on First American's site ."While today's rates appear higher than the 3 to 3.5 percent rates of 2016, they remain well below the historic average of 8 percent. Yet, the increase in borrowing costs for home buyers, given increasing home prices, has prompted discussion about how the housing market will respond to higher rates."

The future of the industry
Two recent releases from the Mortgage Bankers Association shine a light on just how strong the current mortgage market is, and will probably continue to be even as affordability keeps declining through rate and price increases.

The first, a projection for mortgage originations in 2019 and 2020, shows that while refinancing will continue to slide because of higher rates, those for purchases will still offset most of that decline, the MBA said. The total value of purchase originations should rise to $1.24 trillion in 2019, up more than 4 percent from this year's numbers, mostly offsetting a 12.4 percent drop in refinance origination value.

Then in 2020, purchase originations should rise again to $1.27 trillion, with renewed interest in refinancing bringing the total value for the market to $1.68 trillion, the MBA forecast. Mike Fratantoni, MBA chief economist and senior vice president for research and industry technology, noted that home purchase origination is likely to rise in 2021 as well.

"Just 4.47% of mortgages were at least 30 days behind on payments."

Current homeowners keeping up
Meanwhile, the other MBA release - pertaining to mortgage delinquency in the third quarter - showed that lenders likely have little to worry about in terms of consumers defaulting on their home loans. The MBA's latest National Delinquency Survey showed that just 4.47 percent of all mortgages with an outstanding balance were at least 30 days behind on payments, on a seasonally adjusted basis. That was down from 4.81 percent in the third quarter of last year, but up slightly quarter over quarter.

At the same time, the share of homes that moved from merely delinquent on payments to being in foreclosure slipped to 0.23 percent, down a single basis point from the previous quarter, but now stands at the lowest point seen since the final quarter of 1985, the data showed.

Moreover, it's worth noting that a lot of delinquency tends to crop up in the third quarter of the year because that's when many hurricanes make landfall and force people from their homes and businesses, making it harder for people in affected regions to keep up with mortgage payments, the MBA said. The hurricanes this year were far less severe - but still problematic - than those in 2017, which is what prompted the huge year-over-year decline in delinquency. Indeed, the five states that saw the largest annual increases in delinquency for the third quarter of 2018 were those hit hardest by Hurricanes Florence and Michael.

With all these conditions in mind, it's important for consumers to also keep in mind that the sooner they get into the market these days, the better off they will be. Locking in a mortgage deal within the next few months will likely allow would-be buyers to save potentially tens of thousands of dollars over the lives of their loans.

 

 

 

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