This is the eighth installment of HSH.com’s Think Tank series which features in-depth questions and answers from the nation’s top real estate professors and professionals.
Refinance volume is clearly tied to the direction of mortgage rates. Even weekly fluctuations in mortgage rates can dictate the volume of refinances within the mortgage market. With 2014 expected to be a year of rising mortgage rates, we wanted to understand how fewer refinances could impact jobs, credit availability and the type of new loans entering the market.
We asked Dr. Michael Seiler, chair professor of Real Estate and Finance at The College of William & Mary, to explain what impact fewer refinances will have on the market as a whole.
Q: What effect will fewer refinances have on employment, lending standards, the number of purchase and ARM loans within the mortgage industry?
Lending standards will remain high for the foreseeable future because we still remember the harsh lessons learned when we lowered these standards in the past. I expect lending standards to remain high, which does not bode well for refinances.
In terms of loan type, I sincerely hope the percentage of adjustable-rate mortgage (ARMs) will follow its historic average as a small percentage of total mortgage originations. Artificially sustained lower interest rates have dampened an otherwise much harsher lesson homeowners would have learned by taking out too many ARMs. Since I expect interest rates to increase over time, I sincerely hope homeowners focus on fixed-rate mortgages instead. In the current environment, fixed-rate mortgages are much preferred by the majority of homebuyers.
Concerning employment, it is employment that drives the demand for housing. Instability or a lack of confidence in one's employment status causes them to avoid locking into long-term mortgage payments. If people feel they are more likely to keep their jobs, have greater employment stability, etc., then demand for mortgages will increase (all else constant). The unemployment rate will continue to improve which will aid in people's ability to refinance.
Again, I believe interest rates will increase over time which will dampen refinances, but home prices will improve which will encourage refinances as people will actually have enough equity in their homes to qualify for a refinance.
