Will Refinances Drop Off in the Coming Year?

This year has seen an incredible number of refinances take place with some homeowners actually refinancing more than once. Mortgage rates have been low for the entire year and have dropped to historical levels several times. These low rates, together with special refinance programs, have helped bring about the improvements seen in the housing market. Will refinances drop off in the coming year? According to the latest Fannie Mae's December Economic and Strategic Report, the refinance boom is expected to fall in 2013.

According to Fannie Mae's economists "Overall, housing construction activity and home sales are on pace to grow substantially over last year's levels, and we expect further improvement in 2013." Fannie Mae also expects the decline of shadow inventory to continue due to modifications and short sales. Further, the economists said, "Given our expectations of continued improvement in housing starts, home sales, and home prices in 2013, we project that purchase mortgage originations will rise to $595 billion from a forecast of $518 billion in 2012. However, refinance originations should decline to $956 billion from a projected $1.3 trillion in 2012, resulting in a refinance share of 62 percent - a drop of 10 percentage points from the projected share in 2012."

For the week ending December 7th, refinance applications surged to the highest level since the week ending October 12th. The Mortgage Bankers Association's Market Composite Index rose 6.2% on a seasonally adjusted basis. The Refinance Index jumped 8%, while the Purchase Index increased approximately 1% on a seasonally adjusted basis. Mortgage refinance applications accounted for 84% of the total applications. The HARP loan represented 29% of total refinance applications. One week later ending December 14th, applications fell 12.3 percent. The seasonally adjusted index of refinancing applications fell 13.8% and purchase applications fell 4.8%. Of total mortgage application activity, the refinance share fell to 83%, a decrease of 1% from the prior week.

Builder Confidence continues to improve according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market survey for December. The report shows that builders of new homes are more optimistic about the housing market leading the index to rise two points to 47. Two of the three component indexes are now above the midpoint of 50. Current sales expectations rose two points to 51 and sales expectations in the next six months fell one point to 51. The component that measures traffic of prospective home buyers increased to one point, but is still only at 36. The Census Bureau and Department of Housing and Urban Development reported that for November housing starts fell 3% while building permits rose 4%.

In a recent report by Freddie Mac's U.S. Economic and Housing Market Outlook, the agency stated that mortgage rates are expected to remain low through the first half of 2013 and then gradually increase. According the their economists, the refinance boom will continue into early 2013 and it is expected that single family mortgages will decline by 15% while multifamily housing will rise by 5%.

Both of the popular refinance programs, HARP loans and FHA streamline, are available until the end of 2013. These programs have had significant impact on the housing market by giving homeowners the chance to refinance to low mortgage rates even though these existing loans are underwater. This action has saved homeowners a lot of money, as well as, saving many of these homes from default. In order to keep mortgage rates down, the Federal Reserve continues to purchase $40 billion of mortgage backed securities each month until the unemployment rate falls below 6.5%. This is expected to be somewhere around 2015. While many homeowners have already refinanced through the HARP loan and FHA streamline, there are many who have not done so yet. These refinances should continue to flow into the new year while low interest rates are still available. However, since the bulk of refinance loans are not for these programs, regular refi activity may continue into the new year since many homeowners have actually been refinancing several times, not just once. That is, if mortgage rates remain low.

Whether the refinance boom will continue into the new year depends on many factors, including the outcome of the fiscal cliff negotiations. Anything that increases taxes on low to middle income families will probably keep these consumers from having the means to purchase a new home. Until the economy is on some solid footing, many existing homeowners will remain put and opt to refinance instead of purchasing another home. If home prices continue to increase, many consumers may not be able to purchase a home that is affordable. Finally, if the Feds are successful at keeping mortgage rates down, mortgage activity should continue into the new year along with the minor curves that normally happen.

If HARP 3 legislation were to pass, refinances will once again boom in 2013. Expanding the HARP program to include all mortgages would help the industry maintain the momentum while save additional homeowners a significant amount of money. These savings are normally fed back into the economy and increases growth which eventually could lead to more jobs.

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