To visualize the impact the recent spike in mortgage rates will have on the US housing market in general, and home refinancing activity in particular, look no further than this chart from the October Mortgage Monitor slidepack by Black Knight.
The chart profiles the sudden collapse of the refi market using October and November rates. As Black Knight writes, it looks at the – quite dramatic – effect the mortgage rate rise has had on the population of borrowers who could both likely qualify for and have interest rate incentive to refinance. It finds it was cut in half in just one month.
Some more details from the source:
- The results of the U.S. presidential election triggered a treasury bond selloff, resulting in a corresponding rise in both 10-year treasury and 30-year mortgage interest rates
- Mortgage rates have jumped 49 BPS in the 3 weeks following the election, cutting the population of refinanceable borrowers from 8.3 million immediately prior to the election to a total of just 4 million, matching a 24-month low set back in July 2015
- Though there are still 2M borrowers who could save $200+/month by refinancing and a cumulative $1B/month in potential savings, this is less than half of the $2.1B/ month available just four weeks ago
- The last time the refinanceable population was this small, refi volumes were 37 percent below Q3 2016 levels
Which is bad news not only for homeowners, but also for the banks, whose refi pipeline - a steady source of income and easy profit - is about to vaporize.
It's not just refinancings, however, According to the report, as housing expert Mark Hanson notes, here is a summary of the adverse impact the spike in yields will also have on home purchases:
- Overall purchase origination growth is slowing, from 23% in Q3'15 to 7% in Q3'16.
- The highest degree of slowing - and currently the slowest growing segment of the market - is among high credit borrowers (740+ credit scores).
- The 740+ segment has been mainly responsible for the overall recovery in purchase volumes and in fact, currently accounts for 2/3 of all purchase lending in the market today.
- Since Q3'15 the growth rate in this segment has dropped from 27% annually to 5% in Q3'16. (NOTE, Q3/Q4'15 included TRID & interest rate volatility making it an easy comp).
- This naturally raises the question of whether we are nearing full saturation of this market segment.
- Low credit score growth is still relatively slow, and only accounts of 15% of all lending (as compared to 40% from 2000-2006), the lowest share of purchase originations for this group on record.
ITEM 2) The "Refi Capital Conveyor Belt" has ground to a halt, which will be felt across consumer spend. AND Rates are much higher now than in October when this sampling was done.