Gradually rising mortgage rates have dampened refinancing volume this year. But is the refi boom really over?
Fannie Mae’s Economic and Strategic Group just revised its 2021 forecast last week. The new report includes a downgrade of purchase originations and an upgrade of refinance volume. In particular, the forecast finds that more than half of borrowers could benefit by at least 50 basis points if they refinance.
Overall, the revision responds to a few major factors shaping today’s market, including:
—Ongoing record-breaking housing supply shortages
—Massively high home prices across the country
—Mortgage rates that have dipped below 3% for more than a month
Let’s dig into Fannie’s revised forecast and what it means for lending professionals.
A peaking housing market
The ESR group’s new forecast increases overall GDP expectations modestly from 6.8% to 7% due to better-than-expected consumer spending as the U.S. economy has reopened.
In fact, the recovery trend is so strong that some economists predict it will push the red-hot housing demand downwards. According to Redfin, there are signs that the housing market has reached its peak. For the seven-day period ending May 16, pending sales were down 10% from four weeks prior. At the same time, mortgage purchase applications decreased 4% from the previous week.
“Make no mistake, the housing market is still very hot and will remain hot for the rest of the year,” said Redfin Chief Economist Daryl Fairweather. “But there may be signs that some buyers would rather spend their money on restaurants, vacations, and other things they have held back on for the past year, instead of on housing now that the threat of the pandemic is dissipating in America.”
The ESR group’s newly revised forecast mirrors this sentiment. Its report cuts $43 billion from its 2021 purchase volume forecast. It now predicts that purchase mortgages will reach $1.8 trillion by the end of the year.
An increase in projected refis
While Fannie’s purchase forecast decreased, rates that have fallen back to sub-3% levels resulted in an increased refinance volume outlook. Specifically, the ESR group expects refinances to reach $2.2 trillion in 2021. That’s a $125 billion increase from last month.
Further, the new forecast also boosts the expectations for refinance volume into 2022. Despite still expecting a sizable drop from 2021, the forecast increases predictions by $43 billion.
“We expect refinance volume in 2022 to total $1.1 trillion, an upward revision of $43 billion from last month’s forecast, but a decline of 49% from 2021,” said the ESR group. “At current interest rates, we estimate around 51% of all outstanding mortgages have at least a 50-basis point incentive to refinance, up from 42% in last month’s forecast given the recent rate declines.”
How lenders can capitalize
Many lenders are grabbing at loan volume in today’s volatile market. With would-be home buyers edged out of the market because they simply can’t find an affordable home, some lenders are loosening credit standards to increase their pool of customers. Still, 50% of houses are currently selling over list price and homes are flying off the market in just 17 days. With these record-breaking conditions, many buyers are simply out of luck.
Despite the extremely tight purchase market, rates that remain historically low give lenders an opportunity to connect existing customers and leads with refinancing options. Recent declines in rates significantly increase the pool of homeowners who stand to benefit from refinancing. If lenders want to take advantage of today’s unique market conditions, they should proactively market to homeowners who could save money from lower rates.