Stocks and Mortgage Bonds are both higher to start a very important news week, highlighted by the Fed’s favorite measure of inflation, PCE (Personal Consumption Expenditures) on Friday.
Are you ready for the Refinance Boom?
Inflation is coming down, the labor market is softening, and the Fed is getting ready to cut rates. The long end of the market (mortgage rates) should respond well, but are you ready to take advantage of the refinance opportunities we are going to see in the year ahead?
Looking at the loans originated between 2022 to 2024 there were:
There are more loans out there that are legacy loans, but if they did not refinance in the past, maybe there is a reason for this and we are not counting them.
There are 6 million loans that could be ripe for refinances, should rates reach lower levels. If we assume that the customer needs at least 0.5% in rate savings, with $2,000 in hard closing costs (excludes prepaids and escrows), and a $500,000 loan amount, the typical breakeven would be about 12 months. Clearly we are making some assumptions here, but we think that 0.5% lower rate compared to what the customer currently has is a reasonable amount to trigger some of these.
That would mean that if we hit the follow rate targets, we would see a lot of opportunities:
Number of Refinances Triggered
In 2023, total loans including purchases and refinances were 4M. If get to some of the levels above, there would be a significant increase in transactions.
On the purchase side, one of the biggest headwinds we are seeing is the lock in effect – Where buyers may want to move into a bigger home, but the rate differential compared to what they are paying is too much. Unlike a refinance, where you need a lower rate, on a purchase a customer likely just wants a rate not too high above their current one – We think in most cases this objection or headwind goes away when we can get to 1% or less above their current rate.
If we were to see rates come down to the following levels, you can see how many purchase loans could be unlocked. Of course not everyone will buy, but the amount of buyers that would now likely have this rate headwind removed is huge:
5.5%: 9.5M (represents buyers with a current rate of 4.5% or higher)
6.125%: 7.5M (represents buyers with a current rate of 5.125% or higher)
6.625%: 5.5M (represents buyers with a current rate of 5.625% or higher)
This is just for fixed rate loans, but refinances could also come back in vouge once the yield curve becomes positive again and is no longer inverted. Currently, we are seeing an inverted yield curve, which means that short term rates are higher than long term rates, which makes it tough to do an ARM. The share of ARM loans is only 5.8% according to the latest data from the MBA, but it’s normally in the 15% to 20% range.
Once the Fed starts to cut rates, short term rates will fall sharply. Even though long term rates should also fall, especially as inflation continues to fall, they will do so more slowly than short term rates, causing the yield curve to un-invert. This should unlock even more buyers, as ARMs can help them to get an even lower rate in many cases.
News This Week
Tuesday: Existing Home Sales
Wednesday: Mortgage Apps, New Home Sales
Thursday: Durable Goods Orders, Q2 GDP Reading, Initial Jobless Claims
Friday: Personal Consumption Expenditures (PCE)
Technical Analysis
Mortgage Bonds closed beneath the 100.914 floor of support on Friday and are testing that level as resistance this morning. If Bonds can break above this ceiling, the next stop is 101.20. On the other hand, if Bonds continue to get rejected, there is nearby support at the 25-day Moving Average and 100.628 Fibonacci level.
The 10-year is trading at 4.22%, just beneath a very important level at 4.25%. If yields can remain under this level, they have room to improve and move lower until reaching 4.17%. With a little luck and some good inflation data this week, we could see yields break under 4.17%, with the next stop then being all the way down at 4.07%. We would like to be patient and give the market a chance going into Friday’s PCE inflation report, so long as the market allows us to do so.
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