An expected rise in mortgage interest rates this year will likely curb home refinancing — and affect move-up homebuyers more than other buyers.
The Mortgage Bankers Association expects the 30-year fixed-rate mortgage to rise to an average of 4.1% in 2013 and 4.5% in 2014, up from 3.7% last quarter.
Meanwhile its latest forecast, issued in December, sees the dollar value of refis in the U.S. falling to $818 billion in 2013 and $350 billion in 2014, from an estimated $1.2 trillion in 2012.
Sure, higher interest rates will play a part in the slowdown in refi activity, economists say. But so will the fact that many people wanting to refinance have already done so.
But neither higher rates nor fewer refis are expected to have a significant impact on U.S. housing starts or home sales.
"Interest rates are so low right now that a modest increase wouldn't have much effect on sales," said Walter Molony of the National Association of Realtors.
Home Sweet Refi'd Home
One concern among housing economists is that homeowners who refinanced in the last few years to take advantage of low interest rates will stay in their current homes longer than normal rather than buy a new home and face higher rates.
Molony downplays that scenario, saying the large number of refis in recent years "will not be a game changer" in the market.
"What would be a game changer would be a loosening of credit standards," he said. "Many qualified borrowers still can't get loans. A return to normal standards would boost sales 10% to 15%.
Jay Brinkmann, the MBA's chief economist, says higher mortgage interest rates "will slow down some of the move-up sales." That's because the combination of higher rates and increasing home prices will result in much bigger monthly payments for some homeowners.
But he adds that on the whole, "interest rates don't impact home sales for owner-occupied buyers or for investors. People buy houses for other reasons, because they have a second baby or need another bathroom. They still end up buying a house even if mortgage rates rise.
The MBA sees housing starts up 18% to 909,000 in 2013 and new home sales up 12% to 407,000. It predicts a 3.7% rise in existing-home sales to 4.8 million and a 4.9% median price hike to $186,900.
Brinkmann points out that the volume of mortgage loans for refinancing actually peaked in 2003. That year's heavy refinancing didn't slow home sales, as evidenced by the housing boom of 2004-06.
"(Mortgage) rates really fell in 2003, and a lot of people refinanced because they were coming out of 7% or 8% mortgages," he said. "What we have now is a much tighter stack (of refi applications).
However, there are differences between the current situation and 2003. For one thing, mortgage rates today are historically low, and therefore have little place to go but up. That wasn't the case in 2003 — even as rates began to drop back then, they continued to trend lower over the ensuing years.
Meanwhile, there is evidence some of today's homeowners plan to stay in their homes longer than they normally would — whether or not that's tied to refinancing.
An NAR survey of 93,502 home buyers and sellers shows that the typical buyer in 2012 estimated he would live in his home for 15 years. That's up from the estimated 10 years recorded in the 2010 report.
Question Of Values
Molony says the primary reason for the change is "the price correction following the boom/bust cycle." Buyers now are paying more for homes than a couple years ago because home prices have risen.
As prices go up, "buyers maintain a longer-term view," Molony said.
Some homeowners clearly have more incentive than others to refinance when mortgage rates are low, and to stay put as rates rise.
"If you have a large mortgage, a quarter point move in the interest rate can really impact your monthly payment," Brinkmann said. "People with smaller mortgages might say it doesn't make sense to refinance and have to absorb the costs.
He expects mortgage refis to remain fairly stable during the first half of 2013, then begin to fall off during the second half of the year.
Many homeowners who refinance will seek shorter loan terms than 30 years, Brinkmann says.
"Roughly 35% of refi applications are for shorter than the 30-year fixed rate mortgage," he said. "Even as 30-year rates start to go up, the 15% rate will stay low, so that rate incentive will continue."