Significant Refinance Potential May Help Mortgage Market in 2014

Usingrnan Olympic theme of “Will Housing Take Gold“, Freddie Mac’s economists saidrntoday that, while they had expected housing ‘to come out of the gate at a goodrnclip at the start of 2014, bolstered by an improving economy,” the labor marketrnreport for January instead showed a slow start for the residential sector withrnonly 113,000 new jobs created, well below the 2013 average of 194,000 perrnmonth.  However the unemployment raterndipped, labor force participation edged up, and 48,000 of those new jobs werernin construction and nearly half of those in the residential sector.  The economic analysis, prepared by FreddiernMac’s Chief Economist Frank E. Nothaft and Deputy Chief Economist LeonardrnKiefer was published Tuesday in the company’s monthly Economic & HousingrnMarket Outlook</p

ThernFederal Reserve seems committed to ratcheting down its acquisition ofrnTreasuries and mortgage-backed securities (MBS) as long as growth remains atrnleast at 2013 levels and also likely to taper down its extra purchases to zerornby the end of the year which will put some upward pressure on long-termrninterest rates.  But the effect of Fedrnactions on MBS yields in the short term are likely to be mitigated by a recentrndecline in new issuances related to a seasonal slowdown of new purchasernmortgages and a drop in refinancing because of higher interest rates.  </p

Also global capital market investors havernshifted funds into Treasuries and other fixed-income assets out of concern overrnemerging market growth.  Even as the Fedrnbegan to taper at the beginning of the year 10-year Treasury yields and mixedrnrate mortgage rates generally have eased; down about 0.3 percentage points overrnJanuary and early February.  This hasrnresulted in an increase in mortgage application volume of 20 percent andrnapplications for refinancing rising by 28 percent.  </p

Thisrnincrease, the economists say, underscores that a significant amount ofrnpotential refinancing is out there.  Ofrnthe outstanding 30-year MBS for Fannie Mae, Freddie Mac, and Ginnie Mae, overrn$800 billion have a coupon of at least 5.0 percent.  Even after accounting for servicing and otherrnfees many of the mortgages underlying these securities should have incentive tornrefinance, provided borrowers can qualify in the current credit environment.</p

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Risingrnmortgage rates in the second half of 2013 “stunted” the housing recovery, andrnnew homes sales fell by 7 percent in December. rnExisting home sales reached a 2013 peak of 5.4 million annualized salesrnin August and have declined nearly 10 percent since then although some of therndecline can be attributed to unusually bad winter weather in some areas.  Nothaft and Kiefer note that while total homernsales are approaching the normal historical range, it is the composition ofrnthose sales, new versus existing, that is outside of the normal range.  “We expect overall home sales to rise about 5rnpercent in 2014 relative to last year, with about a 3 percent rise in existingrnhome sales coupled with a 30 percent jump in new home sales,” they say.  They also expect that the elevated rate ofrncash sales – about 30 percent of home purchases will decline with more newrnhomes sales and a larger share of home sales will be financed with a mortgagernin 2014.</p

Theyrncaution, however, that with rising rates it will be difficult for many familiesrnto purchase a home without some income growth. There has already beenrnsubstantial erosion in homebuyer affordability over the past year, “therefore,rnjobs and income growth are necessary for 2014 to turn in another gold-medalrnperformance for the housing recovery.”

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