Slow-but-steady economic growth coupled with the gradual winding down of the Federal Reserve’s most recent round of quantitative easing should be enough to begin to push up U.S. mortgage rates by the end of the year, economists with the Mortgage Bankers Association told reporters yesterday.
"We’re still anticipating rates will hit about 4 percent by the end of 2013 and be closer to 4.5 percent by the end of 2014," said Mike Fratantoni, MBA’s vice president of single-family research and policy. "The major impact of that will be on refinances. We’re expecting a fairly sharp impact on refi volumes in 2013, which will really reach a floor in 2014."
Fratantoni and MBA Chief Economist Jay Brinkmann shared their projections on rates for the next two years at a luncheon at the MBA’s Secondary Markets Conference in New York.
Even that 1 to 1.5 percent shift upward in rates would be enough to chop refis from the first quarter of 2013’s level of $357 billion in volume across the U.S. to $104 billion by the end of the year, dropping to $85 billion by the end of 2014. That would flip the entire composition of the mortgage market from one in which refinance makes up nearly three-fourths of all loans to one in which they are less than a third, according to the MBA’s projections.
The MBA anticipates that the purchase market will continue to grow over the next year and a half, rising to $182 billion by the end of next year from $125 billion in volume in Q1 2013. The last time purchase loans made up the majority of the residential mortgage market was 2006, Brinkmann said.
"The biggest decline in homeownership [over the past several years] was among households with children," said Brinkmann. "I think that perhaps bodes well for what the purchase market’s going to look like in a few years. If prices stay affordable and rates stay down, people will perhaps have saved up some money and as they’re coming off their leases they’ll be looking to buy."
Brinkmann and Fratantoni said the impact of today’s record low rates is likely to linger for several years, flatlining refis once rates begin to inch up. Unlike in previous post-low rate environments, few current owners have built up enough equity in their homes to make a cash-out refi desirable, and banks are less willing to underwrite such deals, dampening the ability for the refinance market to revive.
