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Does Housing Have A Slippery Road Ahead? Yes and No.

December 12, 2016

 

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Rising interest rates dominate credit and housing markets. They surely dominated the October issue of Black Knight’sMortgage Monitor.

We understand the preoccupation with interest rates. We’ve seen quite the increase in rates since the election. The yield on the 10-year U.S. Treasury note is up 50 basis points; quotes on the 30-year fixed-rate mortgage are up roughly as much. A 4.125% quote on a 30-year loan isn’t out of the norm, but then again, neither is a 4.25% quote.

This brings us back to Black Knight’s Mortgage Monitor, which includes commentary on the post-election interest-rate rise. Black Knight notes that the population of refinanceable borrowers has dropped to four million from 8.3 million since early November, matching a low set back in July 2015. 

The good news is that Black Knight tells us that two million borrowers could still save $200-or-more a month by refinancing to realize $1 billion in potential savings. This bad news is this is less than half the $2.1 billion in potential savings that was available just four weeks earlier. The last time the refinanceable population was this small, refinances were 37% lower than in the recent third quarter. 

We’ve read subsequent commentary on the interest-rate insights provided by Mortgage Monitor. Most of the commentary paints a bleak outlook. It’s bleak because most of the commentary is extrapolation: Rising interest rates lead to lower mortgage volume, both from fewer refinances and from fewer purchases. 

But to simply extrapolate is frequently to engage in faulty reasoning. 

Yes, refinances are down perceptibly over the past month. Purchase activity, however, has held steady. What’s more, purchase activity across the country ticked higher last week, so the MBA tells us.  Housing activity – sales and new-home construction – remains brisk. 

To be sure, refinance activity will languish compared with activity earlier in the year.  But once borrowers acclimate themselves to the new norm – a 4%-plus quote on a 30-year loan – activity should regain momentum. 

What’s more, some mortgage activity could pick up sooner than later. Higher interest rates offer an opportunity to reach out on the risk curve to increase mortgage credit availability. Indeed, the MBA reports that mortgage credit availability rose for the third consecutive month in November. 

The upside to higher interest rates is that they enable lenders to bring more low-credit-score borrowers into the fold. As it is, growth is still slow among lower FICO-score credits, accounting for only 15% of all lending (as compared with 40% from 2000-2006).

Whether mortgage rates rise, fall, or hold steady, the mortgage and housing markets should thrive. We’re not alone in this assessment. Wells Fargo, as the largest mortgage originator, serves as a barometer for the outlook on mortgage lending and housing activity. Since the post-election interest-rate spike, Wells Fargo’s share price has risen 25%. 

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