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The Effect of Higher Interest Rates on the Housing and Mortgage Markets
February 22, 2017
Laurie Goodman, Urban Institute Frank Nothaft, CoreLogic Marietta Rodriguez, NeighborWorks America Saul Sanders, Shellpoint Partners LLC Stuart Pratt, CoreLogic
©2017 CoreLogic, Inc. All rights reserved. Proprietary. ©2017 CoreLogic, Inc. All rights reserved. Proprietary.
The Effect of Higher Mortgage Rates on the Housing and Mortgage Markets Urban Institute-CoreLogic Sunset Seminar
Frank Nothaft, CoreLogic SVP & Chief Economist February 22, 2017
©2017 CoreLogic, Inc. All rights reserved. Proprietary.
Effect of Higher Mortgage Rates
Housing market effects: Affordability lessens Owner mobility may lessen, for-sale inventory remains lean Mortgage market effects: Single-family originations: less refinance New refi mix: more FHA-to-conventional, cash-out, longer-term Credit risk: relatively low on debt outstanding New loans: credit box may open up, fraud risk may increase
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©2017 CoreLogic, Inc. All rights reserved. Proprietary. Source: CoreLogic
Mobility Rate by Year After Purchase Percent of home buyers that sell by length of ownership, 1976-2016
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0 3 6 9 12 15 18 21 24 27 30Number of Years
©2017 CoreLogic, Inc. All rights reserved. Proprietary. Source: CoreLogic
Resell Rate Higher when Rates Move Lower Percent of home buyers that sell by length of ownership, 1976-2016
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Rates up 3% Rates up 1.5%
Rates down 1.5%
Rates down 3%
©2017 CoreLogic, Inc. All rights reserved. Proprietary. Source: CoreLogic
Rising Rates May Be A Hurdle for Resales Percent of home buyers that sell by length of ownership, 1976-2016
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0 3 6 9 12 15 18 21 24 27 30Number of Years
Rates down 1.5%
Rates up 1.5%
©2017 CoreLogic, Inc. All rights reserved. Proprietary.
$0
$400
$800
$1,200
$1,600
$2,000
$2,400
2010 2011 2012 2013 2014 2015 2016 2017 2018
Single-family Mortgage Originations (Billions of U.S. dollars)
Purchase
Refinance
---Forecast---
Mortgage Originations: Drop in 2017 and Stable in 2018
Source: Originations are an average of the latest projections released by Mortgage Bankers Association, Fannie Mae, Freddie Mac and Zelman & Associates. Forecast for Mortgage Bankers Association, Fannie Mae, Freddie Mac as of January 2017. Forecast for Zelman & Associates as of December 2016. 2010-2015 are benchmarked to HMDA. Originations exclude HELOCs.
2016 to 2017: Total: - 18% Refi: - 45% Purch: + 6%
©2017 CoreLogic, Inc. All rights reserved. Proprietary. 8
Refi Booms End Quickly As Rates Come Off Lows Cash-out refi and FHA-to-conventional refi continue
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Forecast 1992-93 Boom
2001-04 Boom
1998 Boom
Source: Home Mortgage Disclosure Act, Freddie Mac Primary Mortgage Market Survey®, CoreLogic; 2017-2018 forecast is average of MBA, Freddie Mac, Fannie Mae and IHS Markit (FRM rate only) projections.
Refinance Share of Lending (Left) Fixed Mortgage Rate (Right)
2009-13 Boom
Refinance Share of Lending (Percent) 30-Year Fixed-Rate Mortgage Rate (Percent)
©2017 CoreLogic, Inc. All rights reserved. Proprietary.
“In the Money” Refinanceable Loans Has Dwindled 11% have rate >5.25%, but 1-in-5 of these are in default
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Interest Rate on Mortgage Debt Outstanding
11% of Active UPB Has a Rate > 4.25% + 100 bps
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Cumulative Share of Active Balance by Interest Rate
Current Rate +100 bps
or higher
Source: CoreLogic TrueStandings
©2017 CoreLogic, Inc. All rights reserved. Proprietary.
0%
2%
4%
6%
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12%
-
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20,000
30,000
40,000
50,000
60,000
2000 2002 2004 2006 2008 2010 2012 2014 2016FHA to Conventional Refinances - Left AxisFHA to Conventional Refinance as a Share of Refinance - Right Axis
FHA-to-Conventional Refinancing A Bright Spot 250,000 FHA to Conventional Refinances Expected in 2017
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FHA Drops MI Cancellation
Number of Refinances Share of Refinance
Source: CoreLogic
©2017 CoreLogic, Inc. All rights reserved. Proprietary.
Effect of Higher Mortgage Rates
Housing market effects: Affordability lessens Owner mobility may lessen, for-sale inventory remains lean Mortgage market effects: Single-family originations: less refinance New refi mix: more FHA-to-conventional, cash-out, longer-term Credit risk: relatively low on debt outstanding New loans: credit box may open up, fraud risk may increase
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©2017 CoreLogic, Inc. All rights reserved. Proprietary.
The views, opinions, forecasts and estimates herein are those of the CoreLogic Office of the Chief Economist, are subject to change without notice and do not necessarily reflect the position of CoreLogic or its management. The Office of the Chief Economist makes every effort to provide accurate and reliable information, however, it does not guarantee accuracy, completeness, timeliness or suitability for any particular purpose.
CORELOGIC and the CoreLogic logo are trademarks of CoreLogic, Inc. and/or its subsidiaries.
Where to find more information Look for regular updates to our housing forecast, commentary and data at http://www.corelogic.com/blog @CoreLogicEcon @DrFrankNothaft
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Laurie Goodman
CoDirector, Housing Finance Policy Center
Urban Institute
@MortgageLaurie
February 22, 2017
Sunset Seminar
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The Effect of Higher Interest Rates on the Housing and Mortgage Markets
• Higher rates lead to a choking off of refinancing activity
• Higher rates lead to mortgages trading with longer durations than models would predict, due to secular decreases in mobility.
• History indicates that, rising rates have been associated with increases in nominal home prices, despite decreased affordability. And, while less affordable than we were several months ago, payments are still affordable by historical standards. Moreover, a supply/demand imbalance gives a further boost to home price appreciation.
• We would expect some loosening of the credit box, both because of higher rates and less enforcement of the false claims act. In addition, this administration may be amenable to changes which make mortgage origination and servicing less cumbersome.
• FHA modifications will become more difficult to execute
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Rising rates have choked off refinancing activity
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2011 2012 2013 2014 2015 2016
PMMS MBA Applications Survey: Refi Activity Index
PMMS rate vs. Refi Activity Index
PMMS rate Refi Index
Sources: Freddie Mac Primary Mortgage Market Survey (PMMS), Mortgage Banker Association (MBA), and Urban institute
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As rates have risen, most of the mortgage universe has become non-refinanceable
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wac %refinancable
Percent Refinancable vs. WAC
WAC Percent
Sources: eMBS, Freddie Mac Primary Mortgage Market Survey (PMMS), and Urban institute
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There has been a secular decline in interest rates since 1981
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PMMS (%) 10 yr Treasury Rate30-Year Fixed Rate Mortgage Rate and 10 Year Treasury Rate
PMMS Rate (Percent)
Sources: Freddie Mac Primary Mortgage Market Survey (PMMS), Credit Suisse, and Urban institute
Payment Rates May Slow More than Expected as Geographic Mobility is Down
Source: U.S. Census Bureau, Current Population Survey
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Percent Movers within Past Year--Owners Percent
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1988 1992 1996 2000 2004 2008 2012 2016
Percent Movers Within Past Year– Renters
Source: U.S. Census Bureau, Current Population Survey
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-6%
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recession PMMS YOY HPI YOY REAL HPI YOY
YOY HPI Growth (Percent) PMMS YOY (Percent)
Historically, Rising Rates have been Associated with Increases in Nominal Home Prices, Despite Decreased Affordability
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Source: CoreLogic, Freddie Mac Primary Mortgage Market Survey (PMMS), U.S. Bureau of Labor Statistics (BLS), and Urban Institute. Note: PMMS YOY = Year over year change in 30 year fixed rate mortgage rate based on Freddie Mac Primary Mortgage Market Survey (PMMS). HPI YOY = Year over year growth rate of nominal home price Index. REAL HPI YOY = Year over year growth rate of home price Index in 2000 dollars.
Supply/Demand Gap 2015
1-4 family 5+ family Total
Private Residential Completions
657 310 968
Manufactured Houses 69
Gross New Supply 1037
Less: Obsolescence Rate* 418
Net New Units 619
Household Formation 1050
Supply/Demand Gap -431
Sources: US Census Bureau, U.S. Department of Housing and Urban Development(obsolescence rate)
(Thousands of Units)
* 0.31% of existing stock
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The Supply/Demand Picture, A Time Series
Source: US Census data, Urban Institute Calculations
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Home Prices are Still Affordable in a Reasonable Historical Context
Credit Bubble
$236,000
$317,577
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Housing Prices ($ thousands)
National Housing Affordability Over Time Median sales price
Max affordable price
Max affordable price at 5.5% rate
October 2016
Sources: CoreLogic, US Census, Freddie Mac and Urban Institute. Note: The maximum affordable price is the house price that a family can afford putting 20 percent down, with a monthly payment of 28 percent of median family income, at the Freddie Mac prevailing rate for 30-year fixed-rate mortgage, and property tax and insurance at 1.75 percent of housing value.
Rate Rises are Often Accompanied by a Relaxation of Credit Standards
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Year Loan Count Total Original
UPB ($B) Average Original
UPB ($) Credit Score
Original Combined Loan- to-Value
(CLTV) Ratio
Original Loan-to- Value (LTV) Ratio
Original Debt-to-Income (DTI) Ratio
Weighted Average Coupon (WAC)
1999 1,095,017 137.9 125,942 712 77.6 77.5 33.2 7.3
2000 786,272 103.7 131,824 712 78.8 78.2 35.2 8.1
2001 1,755,361 259.5 147,803 715 76.2 75.5 33.7 7
2002 1,682,959 261.7 155,507 718 74.8 73.8 34 6.5
2003 1,927,030 311.2 161,474 725 73.5 72.1 32.8 5.7
2004 1,127,941 188.1 166,761 718 75.3 73.6 35.6 5.8
2005 1,691,627 289.3 171,017 725 72.2 70.5 36.3 5.8
2006 1,260,389 226.5 179,724 724 74.2 71.7 37.6 6.4
2007 1,220,022 223.8 183,469 725 75.8 73 37.8 6.3
2008 1,179,071 240.2 203,676 742 72.5 70.7 37.2 6
2009 1,973,348 423.1 214,415 763 67.7 65.9 32.3 4.9
2010 1,269,786 265.1 208,760 764 68.6 67.1 32.2 4.6
2011 952,698 207.8 218,075 765 69.3 67.9 32.3 4.3
2012 1,327,587 295.3 222,435 767 69.9 68.6 31.4 3.6
2013 1,297,019 282.9 218,109 760 72.5 71.4 32.5 3.8
2014 967,258 212.2 219,368 752 76.8 76 34.4 4.3
2015 1,003,423 159.8 230,480 754 75 74.2 34.3 3.9
Total 22,516,808 4,159.40 184,723 740 72.9 71.5 34.1 5.4
Sources: Freddie Mac Single-Family Loan Level Dataset Summary Statistics
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