P26
In Focus
While we think that the negative impact of rising
interest rates on house price and housing activity
is likely to be moderate, the refinance market
depends crucially on mortgage rates. The sharp
rates sell-off over the past two months renders
many borrowers who would have been eligible
for refinancing two months ago now ineligible.
For example, we calculate that if the 30-year
mortgage rate is 3.5%, $2.9 trillion of today’s
outstanding mortgages would be eligible for
refinancing. At 4.5%, however, only $1.1 trillion
remain eligible (see page 16 for more detail).
In light of the recent sell-off and our rates team’s
new forecast for Treasury yields, we revise down
our projection of refinance mortgage originations.
We now expect refi volume to decline to $462
billion in 2014 but purchase volume to increase to
$698 billion (see page 22 for more detail).
Another month of good housing data
Housing data were positive in May, although
these data did not reflect the latest increases in
rates. House prices continued to rise but the pace
of the monthly increase slowed across all major
indices. This is consistent with our view that
house price appreciation should decelerate from
the double digit year-over-year growth rate
observed in recent months. Both starts and sales
increased in May. More encouragingly, leading
indicators such as the NAHB Housing Market
Index and the NAR pending home sales index also
increased this month.
Compared to the solid housing data, the
homebuilder equity prices are trading below what
the macro data would suggest, according to our
surprise index. On the other hand, yields on
current coupon mortgages are trading
significantly wider than levels implied by the
recent macro data (see page 20 for more detail).