The pandemic mortgage refinance boom is over, but its impact could last longer.
Mortgage balances increased by $121 billion in the first quarter—the smallest such gain since the first quarter of 2021, according to the Federal Reserve Bank of New York’s quarterly report on household debt and credit. The pullback comes as would-be borrowers hit pause on new loans: The dollar volume of mortgage originations, a measure of home loans, was about $324 billion—the lowest since 2014, according to the New York Fed and
Equifax
data.
The first-quarter report represents a bookend on the turbocharged pandemic housing market, which came as mortgage rates plunged, spurring fierce competition in the housing market and a surge in refinance volume. Quarterly mortgage origination volume earlier in the pandemic surpassed $1 trillion for the first time since 2003, Fed data show.
Homeowners refinanced about one-third of outstanding mortgage balances in the seven quarters of the pandemic refinance boom, according to a team of researchers led by Andrew Haughwoud.
“The mortgage refinancing boom is over, but its impact will be seen for decades to come,” Haughwout, the director of household and public policy research at the New York Fed, said in a statement.
As mortgage rates remained relatively low, homeowners used cash-out refinances to extract $430 billion in home equity, the team’s report, published on Monday, says. In all, about 14 million mortgages were refinanced during the refinance boom, which the researches say lasted from the second quarter of 2020 through the fourth quarter of 2021. “As a result of significant equity drawdowns, mortgage borrowers reduced their annual payments by tens of billions of dollars, providing additional funding for spending or paydowns in other debt categories,” Haughwout said.
The quarter’s data show that higher mortgage rates ended the refinance boom—and the volume isn’t expected to return soon, according to an industry forecast. The Mortgage Bankers Association expects about $432 billion in refinance originations this year, according to its April forecast—a fall from 2022’s $667 billion and 2021’s $2.6 trillion, according to a previously-published forecast.
“The cost of credit is quite high right now,” says Jeff Tucker, a
Zillow
senior economist. A pickup in refinancing will likely come when rates fall to 5% or 5.5%, allowing recent buyers to refinance, Tucker says. “I’m not expecting that in this calendar year,” the economist added.
Prospective buyers disappointed by the selection of homes on the market today could have the pandemic refinance boom to blame. The increase in mortgage rates—off their historic lows earlier in the pandemic—combined with higher home prices, could discourage homeowners from selling, the researchers wrote—a phenomenon often referred to as the mortgage rate lock-in effect.
The rise in rates is one explanation for the relatively low number of new home listings this spring and rising builder confidence, which rose for the fifth month in a row in May, the National Association of Home Builders said Tuesday.
“New-home construction is taking on an increased role in the marketplace,” Alicia Huey, the trade group’s chairman, said in a statement, adding that homeowners with low mortgage rates are choosing not to list.
Equity tapped through cash-out refinances and money saved with lower mortgage rates could contribute to consumer spending, the New York Fed researchers wrote.
Homeowners who tap home equity frequently do so for substantial purchases, such as home renovations. Borrowers withdrew about $82,000 from their home equity during the boom, the report says.
Some of that spending may still be to come. “The improved cash flow generated by the recent refinance boom will potentially provide significant support to future consumption,” the report says.
Write to Shaina Mishkin at [email protected]
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