Potential for growth as rates are predicted to drop further
Mortgage rates eased to 6.71% in January, falling more than one percentage point from their peak in October 2023, according to the latest ICE Mortgage Monitor Report.
Andy Walden, ICE’s vice president of enterprise research strategy, shared his analysis, highlighting cautious optimism for the 2024 housing market.
“Prospective homebuyers may feel an all-too-familiar sense of dread upon hearing that prices – already at record highs – rose another 5.6% in 2023 according to our ICE Home Price Index,” Walden explained. “As always, the truth of the situation is more nuanced than one simple, backward-looking metric might suggest, and the data holds some encouraging signals for these folks.”
The positive signals for the housing market in 2024 include improvements in rates, affordability, and available inventory, alongside a moderation of monthly home price growth on a seasonally adjusted basis.
The current market remains driven by interest rates. With the recent dip in rates, a noticeable uptick in purchase mortgage demand has reached levels comparable to those observed last summer. This trend is consistent with changes in 30-year mortgage rates and their impact on affordability.
The refinance market, while still predominantly focused on purchases, has shown signs of revival, with potential for further growth as interest rates continue to ease.
“While the mortgage market remains overwhelmingly purchase-centric, refinance incentive is rising, albeit slowly, alongside easing interest rates,” Walden said in the report. “Since interest rates peaked back in October, we’ve seen a threefold increase in the number of mortgage holders who could reduce their first lien rate by at least 75 bps with a rate/term refi. And while that population stands at roughly 1.7 million – up from 520K last fall – it is still a historically small number. Should rates fall to 6% by year’s end, as current forecasts suggest, the number of borrowers with refinance incentives would rise, particularly among 2023 vintage originations.
“Under that scenario – a potential needle mover for the refinance market – some 46% of 2023-vintage borrowers would be ‘in the money,’ with nearly a third able to cut a full percentage point off their current rates. As more legacy mortgages regain rate incentive as well, the overall ‘in the money’ population would more than double to 3.8 million by the end of the year, with nearly 60% of that growth coming from loans originated in 2023.”
Walden also discussed the implications of these trends for mortgage originators and the capital markets. As interest rates potentially decrease, the opportunity for refinancing could expand significantly, affecting both mortgage origination strategies and prepayment risks in the capital markets.
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“Originators would do well to identify and engage with these potential customers now,” he said. “Of course, what’s good news for mortgage originators simultaneously heightens prepayment risk in the capital markets. Getting a granular, daily view of prepay activity will become essential this year as investors navigate an extremely rate-sensitive and volatile market.”
Additionally, the report revealed that American mortgage holders’ equity closed 2023 at an all-time high of $16 trillion, an 11% increase from the previous year, bringing the average mortgage holder’s equity to $299,000.
With two-thirds of all equity held by borrowers with credit scores of 760 or higher, the conditions are ripe for a surge in equity lending, assuming interest rates continue to be more favorable for homeowners. This shift offers a promising avenue for lenders to target a low-risk demographic for equity-based products.
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