The Mortgage Refi Boom Is Running Out

The Mortgage Refi Boom Is Running Out

Rising interest rates dealt a critical blow to mortgage originations in the first quarter.

Lenders issued about $859 billion in mortgages in the first quarter, down 25% from the previous year, according to data released by the Federal Reserve Bank of New York on Tuesday. The quarter also marked the first time since early 2020 that originations fell below $1 trillion

The main cause was a sizable drop in refinancings, which fell about 40% from a year ago. Purchase mortgages were roughly flat, a turnaround from two years of double-digit gains.

The mortgage slowdown is yet another example of how rising interest rates are playing out in every corner of the economy. The Federal Reserve has raised interest rates twice already this year in a bid to tamp down the highest inflation in decades, pushing up borrowing costs across the board. That has also pushed up the yield on the 10-year U.S. Treasury, which is closely tied to mortgage rates.

Higher mortgage rates can add hundreds of dollars to a household’s monthly mortgage payment, and have forced some would-be home buyers to give up. A faster-than-expected rise in mortgage rates has also accelerated the decline in refinancings, the juggernaut that drove mortgage originations and industry profit to record levels in 2020 and 2021. Refinancings are expected to make up 33% of mortgage originations in 2022, according to the Mortgage Bankers Association, down from 59% in 2021.

Overall, U.S. consumers are sending mixed signals about how they are feeling. Many Americans are pessimistic about the economy, thanks to accelerating inflation that has raised costs for groceries and gas. The U.S. economy shrank by 1.4% in the first quarter, its worst showing since early in the pandemic. But households have also been spending on travel and entertainment, and consumer spending and personal income both rose in March.

Mortgage rates jumped about 1.5 points in the first quarter and have continued to rise since then. Last week, the average rate on a 30-year fixed mortgage hit 5.27%, its highest level in nearly 13 years.

Higher interest rates shrink the pool of borrowers who could lower their monthly payments by refinancing. That group fell below four million in March, down from about 18 million in March 2021, according to mortgage-data firm

Black Knight Inc.

The combination of higher rates plus continually rising home prices has pushed monthly mortgage payments to their least affordable level since 2008, according to the Federal Reserve Bank of Atlanta. A median American household needed 34.9% of its income to cover payments on a median-priced home in February, up from 29.2% a year earlier.

Americans who can afford to stay on the market are trying to take the sting out of rising mortgage rates, by paying upfront fees to reduce their rate or to lock in a lower rate.

Americans also took out about $177 billion in auto loans in the first quarter, a 16% increase from the first three months of 2021. Much of that jump reflects an increase in car prices rather than an increase in the number of loans issued, economists at the New York Fed said. Auto originations declined about $4 billion from the fourth quarter.

With the average 30-year mortgage rate rising to 5%, home ownership may now be out of reach for millions more Americans. WSJ’s Dion Rabouin explains the impact for potential buyers, sellers and the housing market. Illustration: Adele Morgan

Write to Orla McCaffrey at [email protected]

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