Highest number of refinance applications since pandemic began

Mortgage bonds finally closed the gap between them and Treasury yields (with only a small cushion remaining), making rates a lot more susceptible to change. This week, after yields had a chance to calm down about the Georgia senate election results, the 30-year fixed rate mortgage dropped 6 basis points to 2.87% while the 15-year fell 3 basis points to 2.38%.

current outlook:

Change is in the air with President-elect Joe Biden’s inauguration scheduled this time today. So far, the market has reacted positively, with all three benchmarks reporting gains as of last evening. However, 10-year yields, which have increased over the last six sessions, have some investors spooked that this bull market won’t be here to stay.

Highest number of refinance applications since pandemic began

Can Housing Keep Up the Pace?

Plummeting interest rates and the freedom to work from home pushed many to purchase or refinance in 2020. This led to an estimated $4 trillion dollars in mortgage originations. However, with slowing improvement in unemployment numbers, ongoing rollout of the vaccine, another possible round of stimulus, and continued support from the Federal Reserve, what’s the rest of 2021 going to look like? Freddie Mac says: a slight cooldown in the market, but still good conditions to finance when compared to recent years.

Freddie Mac’s Predictions for 2021 and 2022:

  • Rates will gradually increase to an average of 2.9% for 2021 and 3.2% for 2022
  • Housing price acceleration will slow from a quarter-over-quarter increase of 4% in 2020 to an increase of 1.3% in 2021 and of 0.7% in 2022
  • All this plus an ever-tightening supply will lead to a nearly 20% reduction in mortgage originations in 2021 and a 40% reduction in 2022

For now, these predictions are far from true. Two weeks ago, the mortgage industry experienced the highest number of refinance applications since the start of the pandemic. This happened as rising rates propelled many homeowners to finally get off the pot and refinance.

Retail is Not Selling

Retail sales fell for the third straight month and are down 0.7%. This decrease is smaller than experts had expected. However, this probably has more to do with November and October’s retail sales being revised down than with any strength in sales last month. On a more positive note, retail sales are still up 2.9% from December 2019 and 0.6% for the year overall.

While manufacturing output and industrial production are on the rise, core retail sales, which correspond with the consumer spending component of the U.S. GDP, fell 1.4%. This bodes well for mortgage rates, which experience downward pressure when the economy is underperforming.

Builders Get Stuck with the Bill

.According to the U.S. Census Bureau, single-family permits issued year-to-date had grown 12.2% by November 2020. Multi-family permits on the other hand shrank across all four regions, with the Midwest reporting the smallest drop (-1.9%) and the West reporting the biggest (-10.7%). Unfortunately, this growth and the ability of builders to provide affordable homes is constrained by growing expenses.

What are these expenses?

  • Prices of goods used in residential construction grew 0.7% month-over-month and 5.4% year-over-year
      • Gypsum products (like plaster, drywall, ceiling tiles, etc.) fell 0.4% in price, but increases in the price of softwood lumber (12.5%) and ready-mix concrete (0.7%) erased these gains
  • An index used to measure inputs to residential construction (such as food and energy) increased 1.6% as energy prices increased 5.5%

Entering 2021, we anticipate a modest rise in rates that will likely affect refinance originations, which are coming off a remarkable year. We therefore forecast total originations to decline slightly to $3.3 trillion but remain strong this year.

SAM KHATER, Freddie Mac’s Chief Economist
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