That market, she says, is made up of two distinct parts, the home purchase market which is driven by sales and the refinancing market which is driven by rates. In addition to sales the dollar amount of purchase originations is influenced by home prices, loan-to-value ratios, and the share of purchases that use a mortgage. In the go-go days before the crash all of theses were in high gear producing record high numbers of sales, easy access to credit, and soaring home prices. The economy was also sailing and interest rates were hovering around 6 percent. Then it ended and we had a five-year stretch of low purchase origination volumes.
Late last year we began to see that sector recover; there was a 19 percent year-over-year increase in purchase originations in Quarter 1, 2013. The recent rise in rates, Boesel says, should not significantly slow purchase origination volumes. The higher rates are a signal that the broader economy is strengthening and have positive implications for the housing market. Also the impact of rising rates on housing affordability is minimal. Purchase money originations are estimated to increase between 12 and 22 percent in 2013 compared to 2012 as home prices continue growing and sales improve further.
Refinancing will probably be a different story. Those originations represented about 70 percent of the market for the first half of this year but that share is certain to fall in the second half. The figure below shows the distribution of outstanding mortgages as of May. Before the recent rise in rates about 80 percent of outstanding mortgages had rates higher than the market rate but now only about 55 percent do. CoreLogic estimates that as of July 29 percent of borrowers are “in the money” to refinance, taking into consideration the current market rate, outstanding mortgage rates, and whether potential monthly savings are large enough to justify refinancing.
The recent increases are already having an effect. The Mortgage Bankers Association’s Weekly Applications Survey for late July showed a decrease in applications for refinancing of 12 percent from the prior month and 59 percent from the prior year. Housing market forecasters are projecting a reduction in refinance volume for the second half of 2013 with forecasts for originations ranging from $1 to $1.1 trillion for the year and $700 to $800 billion of that already completed. “Adding in the improving purchase money market, total mortgage originations are estimated to come in between $1.6 trillion to $1.8 trillion for all of 2013,” Boesel says, “a drop as small as 10 percent or as large as 19 percent from 2012.”