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From mid-November to the end of March, the average rate on fixed-rate mortgages plummeted nearly 90 basis points (0.9%) to 4.06% and the MBA Refinance Application Index nearly doubled. Is this the start of a new refi boom? We don’t think so – at least, not quite yet.
Refinance volumes are the most variable and most unpredictable segment of mortgage originations. In the last 20 years, they have ranged from under 30% to over 70% of total first-lien originations.
The granddaddy of all refi booms was in 2003 when refi volume topped $2.5 trillion. The last real boom seen by the industry was in 2012, when refis clocked in at $1.4 trillion. Since then, the biggest year in the refi segment has been $947 billion in 2016 – something that could be classified as a modest mini-boom at best. Last year, refi volume was only about $430 billion, less than half the 2016 volume and the lowest we have seen this century.
So when is that next refi boom coming?
We can’t tell you when, but we CAN tell you what it will look like. Refi booms are triggered when mortgage interest rates fall below a certain threshold. All of a sudden, millions of homeowners can immediately lower their mortgage payments significantly.
One of the patterns lenders will see is that homeowners with the higher loan amounts will always lead the charge, because they will reap the biggest benefits to refinancing.
The chart above shows the number of refi candidates that resulted as mortgage rates have moved since 2001. The 2003 refi boom was triggered when 30-year FRM (fixed rate mortgage) rates dropped below 6%. The 2012 boom was triggered when rates hit 4%. In a previous blog, we mentioned 3.75% as another threshold level that would trigger at least a mini-boom. Upon further analysis, we believe that rate will set off a legitimate, full-fledged refi boom, especially if rates can stay at that level for several weeks.
The last week of March saw mortgage rates average 4.06%, not too far from our 3.75% trigger threshold. Although rates drifted back higher for most of April, they are still within ”spitting distance” of that target.
The key is the U.S. Treasury bond market, and specifically, the yield rate on the 10-year Treasury bond. Mortgage rates fluctuate with that yield rate at a fairly constant premium of 1.5- 1.75%. If the 10-year yield drops below 2.0%, be prepared for a refi boom. And with every new mortgage made now, the number of homeowners that will benefit from a major refinancing event grows. So the longer it takes to hit that trigger point, the bigger the boom will be.