A big part of the problem -- but surely not all -- comes from the folks at the Federal Reserve. They're determined to raise interest rates, a path toward higher costs for lenders and borrowers, which will surely lead to fewer mortgage originations.
It should be noted that while the Fed controls bank rates, it does not directly control mortgage rates. That's the theory. In practice, says The New York Times, "when the Fed's rate goes up, banks find ways to pass their higher borrowing costs along to consumers."
Higher costs are baked into mortgage rate predictions for 2017. The Mortgage Bankers Association says mortgage rates are likely to close at 4.7% by New Year's while the National Association of Realtors puts the number at 4.6%. The National Association of Home Builders says we should average 4.5% for the year while Fannie Mae predicts average rates of 4.3% by the fourth quarter.
If the predictions above come true, borrowers should be elated; rates in the range of 4% and 5% represent bargain basement pricing -- discounted rates far closer to historic lows than historic highs. Things could be a lot worse but don't expect grateful borrowers. As good as the rates will be in 2017, borrowers won't be as charmed as they were in 2016, and that raises both the matter of reality and the problem of optics.
On the reality front, 2016 was an amazing year. According to Freddie Mac, the average annual interest level for prime, 30-year, fixed-rate financing was 3.65%. Remember that number! It's the lowest annual rate on record, lower even than the 3.66% rate established in 2012, the old champ.
You can tell borrowers that rates today are in the gutter by historic standards and they won't care. They will be sobbing and moaning that they missed those golden moments in July and August last year when rates were below 3.5%.
Let's say you borrow $200,000 for 30 years at 3.5% fixed. The monthly cost for principal and interest will be $898. Raise the rate for the same loan to 4.0%, roughly the rate at this writing, and the monthly cost increases to $955. That's a difference of $57 a month or $684 a year.
No matter how many sales awards a loan officer has won, telling borrowers that they have lucked out, that their borrowing costs have only risen “less than” $750 since last summer, will not induce spasms of joy or gratitude. Any rate increase – ANY – will bring on levels of borrower depression requiring months of counseling and consoling.
Not surprisingly, the March MBA forecast suggests that originations will go from 1,891,000 in 2016 to 1,600,000 in 2017, a loss of 291,000 loans.
More than mortgage rates
The problem is that it's not just mortgage rates. They have risen with great visibility and the picture gets worse when borrowers also take a look at home prices. According to NAR, March existing-home prices were 6.8% higher than a year earlier, the “61st consecutive month of year-over-year gains.”
“It's the combination of these slightly higher interest rates plus home prices that continue to rise at a rate that far outpaces wage growth which are beginning to cause affordability issues,” said Rick Sharga, executive vice president at Ten-X.com, the online real estate marketplace. “That's likely to have an impact on loans issued to purchase a home. Lenders will have an even harder time selling refinance loans, where average interest rates have been below 5% since 2009, and most of the borrowers who could have benefited from refinancing their mortgages have already done so.”
Tomorrow: The upside of a rise in interest rates
Everyone likes to see sales and profits go up, but for 2017 the mortgage industry is likely to face a marketplace erosion.