Bay State homebuyers are not just paying more for their homes; they are borrowing more to make their purchases.
The median price for a single-family home in Massachusetts jumped almost 12 percent to $293,500 in 2003 compared to the prior year, according to statistics compiled by The Warren Group, parent company of Banker & Tradesman. And as home prices increase, buyers are securing larger mortgages in order to realize the American dream of homeownership.
Over the past three years, the size of a typical mortgage has ballooned. The median price for a single-family home purchase mortgage in the Bay State in 2003 was $236,800, up 11.7 percent compared with the median mortgage size in 2002 and rising at a pace nearly identical to that of home prices. The median mortgage size in 2001 was $187,000 and the median single-family home mortgage in 2002 was $212,000, according to statistics from The Warren Group, which tracks real estate transactions recorded at registries of deeds throughout the state.
“It is difficult to comprehend that the cost of housing has risen to levels never before seen, forcing most homebuyers into these higher markets requiring higher mortgages,” said Kevin Cuff, executive director of the Massachusetts Mortgage Bankers Association.
Cuff said many homeowners have been priced out of the “trade-up” market – prices have increased partially due to the fact that more homeowners are staying put, remodeling, adding on to their homes and investing in home improvement projects. For those owners opting to stay in their current homes, refinancing an existing mortgage was a popular choice as rates stayed low throughout much of 2003, which witnessed a blistering pace of mortgage origination activity in the Bay State.
John Battaglia, president of Cambridge Mortgage Group and treasurer of the MMBA, said restructuring was a big trend during the refinancing boom of 2003. Many owners refinanced their home mortgages and took out cash to reconstruct their debt or renovate their homes in the process.
Over the past few years, refinancing has been one of the most important vehicles through which households have liquefied housing wealth, and Battaglia said that “fueled a lot of people improving their homes and their debt picture. We also saw people wanting to get into the housing market because rates were low and they wanted to get in before the rates went up. On the horizon, we are looking at pretty good interest rates. I think home prices are going to remain steady, so that bodes well for the next year or so because people will have the motivation to buy homes now with interest rates so low.”
According to the Federal Reserve Bank of Boston, housing has been a crucial pillar of the national economy over the last three years and has been a large contributor to improving economic performance.
“Housing exerted these effects directly, through residential investment, and indirectly, through effects on wealth and consumption,” said Cathy Minehan, president and chief executive officer of the FRBB. “It goes without saying that robust demand for housing increases residential construction. Less obviously, strong sales and rising values strengthen the economy by stimulating consumption and home improvements.”
While borrowers took out more money to purchase their homes in 2003, the size of refinance mortgages in the state also rose. The median refinance mortgage amount borrowed for single-family homes increased by $10,000 between 2002 and 2003, rising to $150,000 from $140, 000. The dollar amount being refinanced in a typical transaction increased even more between 2002 and 2001, when the median single-family refinance mortgage value was $123,500, according to data from The Warren Group.
While loan amounts have increased in recent years, the number of mortgages in the Bay State also has been on the rise.
The number purchase-money mortgages originated in the state for all property types topped 100,000 in 2003, up from about 97,500 in 2002 and 95,500 in 2001.
Refinancing volume in Massachusetts made an even bigger leap, with nearly 740,000 mortgages of all types refinanced in 2003. About 517,000 refinance loans were issued in 2002 and just over 386,000 mortgages were refinanced in 2001. Over the three-year span, refinance mortgage volume in Massachusetts increased by more than 43 percent, marking one of the state’s busiest refinance boom periods ever.
A ‘Vibrant’ Market
In each of the past three years, just over half of the total number of purchase mortgages originated in the state were for single-family homes. On the refinancing side, mortgages for single-family homes accounted for more than 70 percent of the total number of loans in 2003.
Industry analysts and members of the mortgage industry say low interest rates have had a direct impact on the increase in mortgage loan volume for both home purchase mortgages and refinancings. And while many industry watchers expect interest rates to rise slowly in 2004, rates should remain relatively low in historical terms, a source of optimism for the mortgage lenders and brokers.
“I think the biggest thing that accounted for the large refi boom was the dropping of the interest rates. Rates over the last few years dipped into the 5’s and the 4’s [percent] for the first time … and because the rates went down there were different waves of refis that hit the market,” said Battaglia. “The low rates also spurred people to go out and buy. Even though prices were rising, the lower interest rates allowed for people to enter in the market. Because interest rates lowered, that allowed people to borrow more and [a greater number of people] were qualified for more.”
The volume of mortgage refinancing activity rose sharply in 2000 and 2001 and exploded from the third quarter of 2002 through the middle of 2003. That surge in activity contrasts sharply with the 1990-1991 period when rates fell but housing values appreciated less and refinancing volume did not increase greatly. However, the increase in mortgage volume does not equate to a healthy economy, said one industry professional.
“The refi boom was a direct reflection of the lower interest rates; lower interest rates fuel refinancing. The economy has forced interest rates down through the [Federal Reserve Bank] in an effort to sustain an economic recovery,” said James Dougherty, president of the Massachusetts Mortgage Association. “The optimistic point of view is that we are likely to see a stability in rates for a period of time. However, there is nothing in the economy that will give us sustainable growth and improvement that the technology industry gave us in the 1990s.”
Citizens Mortgage Corp., ranked as one of the top five mortgage lenders for the past three years in Massachusetts, originated 30,523 loans in the state during 2003. Steve Adamo, president and chief executive officer of Citizens Mortgage Group, also attributes the heavy volume to low interest rates.
“In the last two years, the [mortgage] market has gotten very vibrant due to interest rates. With interest rates being at an all-time low, it created tremendous opportunity for consumers to consolidate debt, refinance a mortgage, put on additions to their home or buy new homes,” said Adamo. “It’s been a terrific past couple of years for the mortgage industry.”
Adamo said that toward the end of summer in 2003, interest rates started to tick upward, slowing down the refi boom “quite a bit.”
“But the purchase business stayed extremely strong,” he said, because the housing market remains robust and it is still a good time to buy homes, even though consumers may have already refinanced.
Refinance activity is far from dead, however. Last week, the average 30-year fixed mortgage rate fell to 5.58 percent nationally, reaching its lowest level since July 2, 2003, according to Bankrate.com.
The total dollar volume of purchase money mortgages remained steady in the Bay State over the past three years, increasing by about $2 billion from $27.7 billion in 2001 to $29.7 billion in 2003. Total dollar volume of refinance mortgages in Massachusetts surged upward by almost $50 billion during the same period, rising from $105.7 billion in 2001 and $115.7 billion in 2002 to $151.9 billion in 2003.
“I think rates will stay relatively low and the Fed funds will start to inch up later in 2004 and that will have mortgage rates inch up as well. That may slow down [refinancing activity] but purchase transactions should still be very strong,” said Adamo. “All of Massachusetts has done very well – clearly a lot of people have been purchasing vacation homes. Massachusetts is going to stay strong with good housing appreciation and the housing market will stay strong.”
According to Battaglia, the mortgage industry likely will start to see a drop in activity in 2004, although activity nevertheless will be strong. Because a sustained refinance boom is unlikely this year, the mortgage industry will go back to business as usual, he said, with many firms focusing more attention on the purchase market.
“In our business, we won’t be as busy as it was in the last two years. Unless rates hit another low, we won’t see refinancing levels that we did before, and so far we haven’t hit another tier that would [greatly spur a new wave of] refinancing,” said Battaglia. “It’s going to be a normal real estate market – the majority of the business is purchase [mortgages] and we are still doing refinancing, but it won’t be at the level we did it before.”
