Mortgage interest rates remain near historic lows and this past week they hit the lowest level of 2014.
At this pace, originations will hit a 14-year low of $1.14 trillion for the year.
While housing price appreciation has slowed, it has continued, and buying a home remains affordable in most markets. Most notably, buying is cheaper than renting in most every major market in America.
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But mortgage origination activity is not where anyone expected it to be, based on these facts.
Freddie Mac offers three reasons originations are so depressed.
The refinance boom is over
Refinance mortgage originations were down about 60% percent from 2013 to 2014, and we expect them to decline about another 50% from 2014 to 2015. With mortgage rates expected to rise gradually in the coming months, the incentive for borrowers to refinance will decline and new purchase mortgage originations are unlikely to replace the refinance activity of recent years.
Home sales are off
Sales of existing and new homes are down 5% during the first six months of 2014 compared with the first half of 2013. A period of higher mortgage rates, a harsh winter, and slower economic growth compared to a year earlier contributed to the slowdown.
Cash sales are up
People are buying homes, but the number of people who take out a mortgage to purchase them is down compared to last year. All-cash sales of homes in the first six months of this year are up slightly from 31% to 33% according to the National Association of Realtors. However, with rising home values and fewer distressed (REO, foreclosures) homes coming the market, expect the available inventory for all-cash buyers to trend down in the coming year.
Freddie Mac says that it will take sustained economic growth and jobs to bring activity back up.
“The second quarter economic growth of 4% was welcome news after the first quarter’s 2.1% decline. But we need growth in the last two quarters of the year at a better pace than the first half to reach a forecasted annual rate of about 2% - 2.5%,” Freddie Mac analysts said.
They note that while the official unemployment rate has declined, there is – as Federal Reserve Chair Janet Yellen mentioned Friday morning as well – that there is a fundamental weakness in the labor market.
“During the Great Recession, the labor market lost 8.8 million jobs – 78% of them ‘good paying jobs’ according to the National Employment Law Project,” Freddie Mac says.
At this point during the recovery, good paying jobs only account for 56% of job gains (26% mid-wage jobs and 30% higher-wage jobs).
Meanwhile lower paying jobs, which accounted for 22% of job losses during the downturn, have accounted for 44% of job gains.
Freddie warns that even with the labor gains so far, those in the housing industry can expect new and refinance mortgage origination volume for this year to be the lowest since 2000 at about $1.15 trillion.