Refinance Potential May Help Mortgage Market in 2014

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According to the market analysis performed by Freddie Mac’s economists, the expectations for the housing sector, at the beginning of 2014, were not met by reality. The estimates had been positive given the improving economy. However, the slow start of 2014 with just 113,000 jobs created – way below the 2013 median of 194,000/month – explains the situation for the residential market sector. The good news is that the rate of unemployment dropped, and nearly 50% of the new jobs created were in constructions, of which 25% in the residential sector.

The Federal Reserve appears determined to gearing down its taking over Treasuries and mortgage-backed securities (MBS) if the growth keeps at the 2013 levels. By the end of 2014, there will be no more extra purchases by the Federal Reserve, and this is expected to put an increased amount of pressure on long-term interest rates. This federal impact on mortgage-backed securities will be counterbalanced by the recent drop in new issuances. This decline is related to the dipping trend in refinancing, due to high interest rates and to the seasonal slacking off in new purchase mortgages.

Concerns over emerging market growth have caused international capital market investors to  put their money into fixed-income assets and Treasuries. Despite Fed tapering off early this year, mixed-rate mortgages and 10-year Treasury yields have registered a slow 0.3% decrease over January and early February. Under the circumstances, the number of mortgage applications has grown with 20% and that of refinancing applications with 28%.

According to financial experts, this trend clearly points to the large refinancing potential of the market. Of the most prominent 30-year mortgage-backed securities for Freddie Mac, Ginnie Mae and Fannie Mae, more than $800 billion have at least a 5.0% coupon. After paying the closing costs and fees, many of these mortgages have the potential to be refinanced efficiently, on the one condition that borrowers can qualify.

The increase in mortgage rates in the second half of 2013 impacted the recovering real estate market. The result was a 7% drop in new home sales in December. The 2013 sales peak was reached in August, with 5.4 million sales/year. There has been a 10% decline since this yearly maximum but the drop has been partly explained by the very harsh winter weather that affected part of the country.

Even if in the big picture, the total home sales are getting closer to the normal historical range, it’s the types of sales (new vs. existing) that remain out of the normal range. There is a 5% increase estimate for 2014 in the residential sector as compared to 2013. A  rise of 3% is expected for existing homes sales, whereas for new home sales, specialists anticipate a huge 30% jump. Experts also estimate an elevated rate of cash sales. From a statistical point of view, existing home purchases will lose even more ground in favor of new home purchases. A large part of homes will be paid through mortgages.

Financial reviewers warn against the difficulties that potential home buyers will have: in the context of the growing interest rates, families will not afford a home purchase without an income increase. In 2013, the affordability level already dropped substantially. Consequently, for 2014, housing recovery does not look promising without a serious growth of income and jobs.

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