What a difference a year makes.
While the mortgage industry has bought mortgages for several years now, that may be starting to change.
A new report from Optimal Blue revealed that the rate and volume of term refinancing increased nearly 110% in August from the previous month, and 310% from a year earlier.
Driving the emerging trend are cheap mortgage rates, which have finally started to slow down in recent months.
Assuming they continue on their new path, there is a good chance that refis will be back in fashion in 2025 and beyond.
Mortgage Refinance Share Highest As of Spring 2022
It’s been a tough few years for mortgage lenders and home buyers, but the worst may be over.
As mortgage rates nearly tripled from levels below 3% in early 2022 to over 8% last year, founders came up with the saying, “Survive to 25.”
The idea was that if you can wait and ride out the storm (of low borrowing volume) in 2024, you will be rewarded in 2025.
And while that sometimes felt far-fetched, it looks like it could come true, and maybe even ahead of schedule.
The latest Market Advantage report from Optimal Blue found that mortgage loan repayments accounted for 26% of total mortgage loan origination, the largest share since March 2022.
Meanwhile, you can still get a 30-year fixed rate in the 3% range. But rates rose quickly from there, basically wiping out all refinance jobs in a matter of months.
So it is telling that the refinance market share has now returned to those levels and is likely to increase in the coming months and years.
The 30-year fixed rate fell sharply after rising nearly 7.25% this May. It now stands at around 6% and looks poised to hit the 5s sooner rather than later.
Stocks have a strong headwind right now with weak economic data, high unemployment, and a slew of Fed rate cuts on the horizon.
That could free up millions more people to seek financing, including many of the four million who took out 6.5%+ loans starting in 2022.
The Only Way Is Up
While this is good news for the mortgage industry, and for recent home buyers, loan volume is still small potatoes compared to recent years.
If you look at the chart above, you’ll see the context of that 109% monthly increase and 310% year-over-year increase.
The dark blue vertical line (the rate and share of refinancing) has grown significantly, but is still only a fraction of the real estate market’s volume.
But if you compare it to the rates seen in 2021 and early 2022, it doesn’t take much to register big gains.
If we include the cash flow (orange line), which is up 8% monthly and over 20% annually, you get a decent share of the return as well.
And it’s likely that this will only increase as more debt falls into the renovation budget.
Lately, it has often been VA loans that have benefited from refinancing because the loan rates for such loans are so low.
But if rates continue to go down, you’ll start to see more interest in collateralized loans, which make up a large portion of the market.
It has been difficult to pencil in the math on loans sponsored by Fannie Mae and Freddie Mac because of LLPAs (price adjustments). That could change soon.
Home Purchase Loans Have Reduced to Less
While refis are finally on time, the same cannot be said for home loans (light blue line above).
Sure, it still holds a large share of the mortgage market and probably will again next year, but it’s starting to withdraw some of it for repairs.
And that’s worrying given the sharp drop in mortgage rates, which should have put home buyers on the fence.
So far, the impact of lower mortgage rates has been muted, with foreclosures down 16% year-over-year and a staggering 45% since August 2019.
Optimal Blue blamed “continuing affordability and inventory challenges,” with housing prices out of reach for many despite improvements.
Many expected housing prices to rise when prices fell, but I have always argued that there is no inverse relationship.
And in fact, home prices and mortgage rates can fall together if economic conditions are favorable.
Remember, there’s a reason the Fed is looking to cut the fed funds rate by more than 200 basis points (bps) over the next 12 months.
A slowing economy may be good news for mortgage rates, but not for the housing market.
With home prices still at all-time highs across the country and reaching near record lows, it’s not a good time to buy for many people.
Sprinkle in uncertainty about the economy, the election, and even how they’ll pay the real estate agent’s commission and it’s not so much fun anymore.
In other words, very low mortgage rates may not translate into high home prices, or a large number of home sales at the moment.
But given the timing of these low rates (peak home buying season), we won’t know for sure until next spring.
This is where the rubber meets the road.
Before creating this site, I worked as an account manager for a real estate broker in Los Angeles. My experiences in the early 2000s inspired me to start writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the mortgage process. Follow me on Twitter for the latest.
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