February made us think the refi boom was dead and buried. Rates shot up in rapid order to rates above 3%. While that’s still a historically low mortgage rate, the existence of a 2.5% rate on 30-year fixed mortgages through much of 2020 meant that most experts and analysts were saying that the relative cost of refis meant the boom days were over and it was time for mortgage pros to pivot their business to purchase.
The past few weeks have changed that picture. Mortgage rates went sub-3% again last week, after a steady decline through much of April. Does that mean economist predictions around the rate environment were wrong and the refi boom is set to continue? According to one economist, it’s a little more complicated than that.
“People often confuse the statement ‘markets are efficient,’ with the statement ‘markets are perfect,’” said Doug Duncan, chief economist at Fannie Mae. “In February, yields on the 10-year treasury started accelerating because markets were assessing the election, the proposed $1.9 trillion in stimulus, vaccine efficacy and uptake, and how all these factors will impact people’s fear of going out and interacting…The impulse behind the rise in rates was the assimilation, aggregation, and action based on that information, and markets overshot things a little bit.”
Duncan noted that this is not unusual - at major ‘turning point’ moments, markets don’t always get things right and a subsequent correction is needed. He described this recent fall as that correction, coupled with the note that since February we’ve had a bit more information come to light around inflation, notably that it’s still well within the bounds of the Fed’s targets. His prediction remains that we will end the year with 30-year fixed mortgage rates around 3.4%, a rise of about 40 basis points he believes will be far more gradual than the spike we saw in September.
What that means, from Duncan’s perspective, is that there’s still plenty of refinance business to be had. He noted that if you forgot 2020 entirely (and I’m sure many of us would like to), then jumping from 2019 to 2021 homeowners would see a 30-year rate around 3% - and jump at the opportunity to refinance. This is still, he noted, the lowest rate any of us will likely see again in our lifetimes. There are also still potentially millions of homeowners who, for some reason or another, didn’t refinance in 2020 and may now qualify for a great rate. Even if we are moving to a purchase market, he noted that this is a relative term, with lots of refinance volume to be had.
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Other opportunities in the refi market are arising due to the housing market. Duncan noted that an FHA borrower paying mortgage insurance might have generated enough equity in their home that they can refinance out of that FHA loan into a conventional loan without that insurance premium and with a lower interest rate. That equity growth, too, has opened up more opportunities for cash-out refis among homeowners who might need the extra liquidity.
In the face of all those opportunities, though, Duncan believes that the purchase market should remain the core of any originator’s business.
“I’m of the view that you should always keep your eye on the purchase market, because that’s really what the core bread and butter of the mortgage finance business is, helping people acquire credit to buy a home,” Duncan said. “Refinancing is an option to be exercised if rates move beneficially to you, but that’s not the core of the business. It’s often the largest volume, but this has been a 50-year declining nominal interest rate ride, going from 18% mortgages in 1979 out to 2.5% mortgages in 2020. We’re unlikely to see that in our lifetimes again.”