Mortgage Market Evolves: More Purchase & HELOCs, Less Refinances: Less single-family refinance in 2017 as mortgage rates remain higher than a year ago

Mortgage originations are affected by economic growth and the level of mortgage rates.  Economic growth is expected to be stronger in 2017 than last year, which creates jobs, income, and additional construction, each of which supports purchase-mortgage lending.  However, higher mortgage rates work in the opposite direction: as mortgage loans become more expensive, originations generally fall.

Mortgage rates have begun to move higher.  To date, rates on 30-year fixed-rate mortgages are up more than one-half percentage point from the 3.5 percent low of last summer, and are predicted to rise to about 4.5 percent by year-end 2017. (Figure 1)

In the past, when mortgage rates have moved up from a recent low, refinance activity has fallen sharply, and we expect this to happen with the latest rise in rates.  For example, the interest rate on fixed-rate mortgages rose by just over one percentage point during 2013, and the refinance volume in 2014 fell about 50 percent.  With interest rates up from last summer’s lows and expected to trend higher, housing economists project refinance volumes to drop during 2017.

Serving as a partial offset to the drop in refinance, home-purchase lending is expected to rise because of more new-home building and stronger income growth. (Figure 2)  Also, homeowners who want to tap home equity for remodeling are likely to turn to HELOCs or other second-lien products to finance their home improvements, rather than refinance their low-rate first mortgage.  Still, the expected increase in home-purchase and HELOC activity will offset only a portion of the reduction in refinance. 

Overall, housing economists are expecting about an 18 to 20 percent decline in the dollar amount of single-family originations in 2017, or about a 23 to 25 percent drop in new loan counts after adjusting for the projected 5 percent rise in home prices during 2017.  Moreover, after the drop in 2017, no further big declines are expected:  Origination volumes in 2018 are expected to be similar to 2017, as home-purchase gains match any further erosion in refinance volume.

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