If nothing else, the headline of
this months' Outlook from Freddie Mac
was a grabber. "Mortgage Originations
Poised to Surge," it read, and what followed detailed what the company's
economists expect from housing in a year where home sales in the first seven
months outstripped every other comparable period since 2006.
New and existing home sales through
July totaled 3.4 million and the company says indications from both mortgage
applications and pending home sales imply that this momentum will be sustained through
the third quarter and that housing will remain a bright spot as the rest of the
economy "sputters along."
The most recent data on mortgage
originations are for the second quarter of 2016 which ended only days after the
Brexit vote. That event caused 10 year U.S. Treasury yields to fall 19 basis
points and mortgages rates to decline by 8 basis points followed by 7 more
points the first week of July.
Mortgage originations were strong
even before Brexit triggered the plunging rates. Outlook
quotes Inside Mortgage Finance figures
reporting $510 billion in first lien mortgage originations in the second
quarter of 2016 and its own slightly higher estimate of $535 billion which
includes second liens. This surge was primarily due to stronger sales and
higher prices. Total home sales for the second quarter were up 5 percent in
2016, compared to 2015 and homes prices increased about 6 percent
year-over-year in the second quarter. Assuming that the cash share of home
sales was roughly constant and average loan-to-value ratios also remained about
the same as in the second quarter of 2015 to the second quarter of 2016,
purchase mortgage originations should have been up about 11 percent over that
It takes, according to Ellie Mae,
about 46 days to close a refinance origination.
So if a homeowner were prescient and ready to finance the day after the
Brexit vote, that refinance would probably not show up in origination figures until
early August. In addition to the
rate-driven refinancing there are other indications that originations will
surge in the third quarter. Home sales in July were off the year-earlier pace,
but pending home sales and home purchase mortgage applications were up.
The National Association of Realtors,
in fact, reports pending sales are at their second highest level in over a
decade and purchase mortgage applications are up 11 percent from last year.
Even if home purchase originations are flat year-over-year, total originations
will rise due to strong refinance activity. Application data from the Mortgage
Bankers Association indicates that refinance applications have risen about 24
percent from the second quarter of this year and are up nearly 60 percent
year-over-year in the third quarter.
Freddie's current forecast calls for
a $60 billion, or 11 percent, increase in third quarter originations relative
to the second quarter, and for total originations to reach $2 trillion in 2016.
With rates rising modestly over the next few quarters refinance, activity will
likely decline. Purchase originations will rise, but not enough to offset the
decline in refinance activity. They project that total originations will fall
by $350 billion to $1.65 trillion in 2017.
Second quarter refinancing stats show
a few other key trends. For most quarters between 2010 and 2013 the
"cash-out" refinance share fell, ranging between just 15 and 20
percent. In recent quarters the share of mortgages with loan amounts that were
at least 5 percent higher than the original mortgage balance has been rising -
41 percent in the second quarter, up from a revised 38 percent in the first
quarter of 2016.
During the second quarter of this
year, an estimated $13.3 billion net dollars of home equity were converted to
cash during the refinancing of conventional prime-credit home mortgages. This
is up from $11.4 billion in the first quarter of 2016 but substantially less
than the peak cash-out refinance volume of $84.0 billion during the second
quarter of 2006.
With rates near historic lows, there
is a trend of refinancing more recent loans. The median age of a refinanced
loan was 5.5 years in the second quarter, the lowest since the first quarter of
2015. The average interest rate reduction in the second quarter was about 1.1
percentage points, translating into mortgage payment savings on average of
about $2,500 per year.
Nationally, house prices have
increased about 3 percent over the six months from December 2015 to June 2016.
The combination of rising house prices and falling rates have resulted in increased homebuyer affordability as the
impact of lower mortgage rates has more than offset the rise in house prices,
at least nationally. Of course, some markets have seen 6-month house price
appreciation of over 6 percent, but, on balance, lower rates have maintained or
slightly improved homebuyer affordability.
Freddie Mac's economists expect
mortgage rates to gradually rise in the coming months, ending 2016 around 3.6
percent and averaging 3.6 percent for the year. This would be the lowest annual
average in the past 40 years. They expect
rates to drift modestly higher next year, ending 2017 at about 3.9 percent and
averaging 3.7 percent for the year.
They have revised their forecast for
home price appreciation upward, to 5.6 percent in 2016 and 4.7 percent in 2017 from
last month's forecast of 5.3 percent and 4.0 percent respectively. They still expect house price growth to
moderate over the next year as new supply comes to market and higher mortgage
rates dampen homebuyers' demand, but at a more moderate pace than before.
Housing aside, the economic news is unexciting
with an economy growing just fast enough to avoid stalling. There should be a modest bounce back in Real
GDP growth this quarter after a disappointing second quarter with growth of 1.1
percent. Freddie's economists are
forecasting an increase in Real GDP of 2.1 percent for the second half of 2016
bringing the year's total to 1.9 percent.
The August employment report show
solid job gains finally seem to be translating into some modest income gains
and July job openings were 5.9 million, the highest on record.