Refinances to See Second Wind?

There’s no denying that 2014 has been lackluster for the housing market so far, but economists at Freddie Mac aren’t ready to pack up their optimism just yet.

Noting that interest rates have spent most of the last two months on a downward slope (despite actions from the Federal Reserve to bring down asset purchases), Freddie Mac’s chief economist, Frank Nothaft, says the refinance segment of the market may be getting its second wind, thus giving a lift to overall applications activity.

“This dip in long term mortgage rates has resulted in a seasonally adjusted mortgage application volume increase by more than 20 percent since the end of 2013 (28 percent for refinance), as reported by the Mortgage Bankers Association,” Nothaft said. “Despite high levels of refinance volume over the past few years, this application increase underscores that a significant amount of potential refinance remains.”

For example, an examination of GSE 30-year mortgage-backed securities outstanding finds more than $800 billion in securities with a coupon of at least 5.0 percent, suggesting many of the underlying loans could have their payments lowered by refinancing.

While today’s historically low rates may still be able to draw more refinance numbers, they have had a chilling effect on home sales, dragging new home purchases down 7 percent month-over-month in December and bringing down existing-home sales by nearly 10 percent from their peak in August 2013.

While Nothaft maintains total home sales are nearing “normal” levels when considering historical rates, the composition of new versus existing-home sales is “outside the normal range.” Also abnormal is the elevated share of all-cash sales, which the GSE says has remained at about 30 percent over the past few years.

“We expect to see more new home sales and a larger share of home sales financed with a mortgage in 2014,” Nothaft said.

Of course, all of that depends on whether employment and income growth will be able to keep pace—and so far, things haven’t looked good on that front.