In the immediate aftermath of the presidential election, 30-year mortgage rates have spiked by 0.49 percent in just a few short weeks, according to Black Knight Financial Services, Inc.’s latest Mortgage Monitor Report, based on data as of the end of October 2016. Black Knight examined the impact of these jumps on the population of borrowers who could both likely qualify for and have incentive to refinance as well as the wider matter of home affordability.
As Black Knight Data & Analytics Executive Vice President Ben Graboske explained, the effects have been dramatic, but still must be seen in the proper historical context.
“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,” Graboske said. “As mortgage rates jumped 49 BPS (basis points) in the weeks following the election, we saw the population of refinanceable borrowers cut by more than half. From the 8.3 million borrowers who could both likely qualify for and had interest rate incentive to refinance immediately prior to the election, we’re now looking at a population of just 4 million total, matching a 24-month low set back in July 2015.
“While there are still 2 million borrowers who could save $200 or more per month by refinancing and a cumulative $1 billion per month in potential savings, this is less than half of the $2.1 billion per month that was available just four short weeks ago.”
He said these changes will likely have an impact on refinance origination volumes moving forward. And because higher interest rates tend to reduce the refinance share of the market – specifically in higher credit segments – which typically outperform their purchase mortgage counterparts, they may impact overall mortgage performance as well.
“In addition, from an affordability perspective, that 49 BPS rise in interest rates was the equivalent of the average home price jumping by over $16,400 basically overnight,” he continued. “It now takes 21.6 percent of the median income to purchase the median home nationally. That’s the highest share of median income needed to buy the median home since June 2010, when rates were at 4.75 percent, but the average home was worth nearly 20 percent less than it is today.
“Even though we’re still 10 percent below long-term historic norms for affordability, the last time we saw affordability near this level – in late 2013 at 21.4 percent – home price appreciation experienced an immediate pullback, decelerating from 9 percent to below 5 percent nationally. With that recent historical precedent, it’s worth watching to see how home prices react to such an abrupt rise in rates over the coming months, particularly as we await the Federal Reserve's next moves on the benchmark federal funds rate."
Black Knight also looked at Q3 originations, finding despite a slight quarterly decline in purchase lending, overall originations were up 6 percent from Q2 because of a 17 percent quarterly rise in refinance lending. The $579 billion in loans originated in Q3 2016 marked the highest total origination volume since Q2 2009. Purchase volumes continue to rise; they are up 7 percent from last year, and at $818 billion, year-to-date volume is the highest for the first three quarters of any year since 2007.
Overall purchase origination growth is slowing, however, and most markedly among higher credit borrowers with 740+ credit scores. As this segment has been mainly responsible for the overall recovery in purchase volumes since the recession and currently accounts for two-thirds of all purchase lending, such signs of possible market saturation bear close watching, Black Knight said.