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Mortgage Refinance Applications Are Collapsing. What’s the Impact on the Economy & Markets? – WOLF STREET

Consumer spending and asset prices both were boosted by them.

By Wolf Richter for WOLF STREET.

Homeowners refinance their homes largely for two reasons: One, to benefit from lower interest rates and thereby reduce…….

Consumer spending and asset prices both were boosted by them.

By Wolf Richter for WOLF STREET.

Homeowners refinance their homes largely for two reasons: One, to benefit from lower interest rates and thereby reduce the monthly payment; or to extract cash from their home whose price has risen. Lower mortgage payments leave homeowners a little extra spending cash every month. And a cash-out refi generates a pile of cash all at once, which can be used to remodel the home, buy stocks or cryptos to get rich quick, pay off maxed-out credit cards that carry 25% interest, make a down payment on a rental property or vacation home, or blow in other ways. Both types of refinancings provide extra oomph for consumer spending and the markets, including the stock and real estate market.

But interest rates have soared in recent months. The average 30-year fixed mortgage rates hit 5.02% yesterday, the highest since November 2018, when it peaked 5.05%, according to the daily measure by Mortgage Daily News. According to the weekly measure by the Mortgage Bankers Association today, the average 30-year fixed mortgage rate hit 4.90%, the highest since December 2018.

And applications for mortgage refis have collapsed. The MBA’s weekly Refinance Mortgage Applications Index, released today, dropped to the lowest level since March 2019, down 62% from a year ago, and down 82% from the peak in March 2020:

No-cash-out refis are motivated by locking in lower mortgage rates to get lower monthly payments. They’re directly driven by changes in mortgage rates. Mortgage rates having been so low for over two years, many homeowners have already refinanced and recent mortgage rates are far higher than what they’re paying, and refis are off the table.

Cash-out refis, which are motivated by the need or desire to extract cash, surge with rising home prices. And home prices have spiked in a historic manner. And people wanted to – and still want to – extract cash while they can without selling the home.

So at first, homeowners trying to extract cash blew off the increase in mortgage rates. But those refis have now also started to come down from high levels.

According to the American Enterprise Institute’s Housing Center’s monthly update as of March 28, cash-out refis in week 12 (March 19 through March 25) have dropped 17% from the same week in 2021, but remained up by 55% from the same week in 2019.

This was the first period that cash-out refis have shown “some effect from the headwinds of higher interest rates,” the AEI’s report said.

By contrast, according to the AEI, in week 12, non-cash-out refi volume had collapsed by 85% from a year ago.

Layoffs at mortgage lenders, yes but…

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Source: https://wolfstreet.com/2022/04/06/mortgage-refinance-applications-are-collapsing-whats-the-impact-on-the-economy-markets/

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