The US refinance boom is over

The US refinance boom is over

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Americans rushed to refinance their home loans during the pandemic as the US Federal Reserve lowered interest rates to near zero. Now that the central bank is rolling back its covid-19 response, the number of homeowners refinancing their mortgage is collapsing.

The housing market is one of the first places to show the effects of the Fed’s inflation-curbing strategy. Mortgage rates, for example, have shot up to 5.27% in May from 3.2% in January. Commercial banks saw less demand for all types of residential real estate loans in April, even as banks have eased lending standards, the Fed reported on Monday.

New York Fed data released on Tuesday show mortgage originations slowed in the first quarter. This was mostly driven by the number of lenders refinancing their mortgage falling off a cliff. But purchase originations—mortgages to buy a new house—declined as well.

“Many borrowers who were inclined to refinance have probably already done so,” New York Federal Reserve researchers said on a background call.

“Between higher interest rates and higher sales prices, along with high gas prices and a volatile stock market, we’re seeing a pullback in our sales,” a Philadelphia based home builder told John Burns Real Estate Consulting in its April homebuilders survey.

Consumers are still spending—for now

Even as mortgage refinancing slowed down in the first quarter, Americans accrued more household debt than any other first quarter since 2006. Overall, households added $266 billion in debt in the first quarter. They now owe $1.7 trillion more than they did before the pandemic, with household debt totaling $15.8 trillion.

As consumers take on more debt, there are also signs they’re having more trouble paying it off.  After collapsing through the pandemic, delinquency rates are inching up on credit cards, mortgages, auto loans, and home equity lines of credit. There was also a small uptick in new foreclosures.

For homebuyers with a big budget, this might make for less competition, but it also means buyers with tighter funds will get priced out.

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