The mortgage boom is running out


Rising interest rates dealt a critical blow to mortgage originations in the first quarter.

Lenders issued about $859 billion in mortgages in the first quarter, down 25% from a year earlier, according to data released Tuesday by the Federal Reserve Bank of New York. The quarter also marked the first time since the start of 2020 that creations fell below $1 trillion.

The main cause was a significant decline in refinances, which fell about 40% from a year ago. Purchase mortgages were about flat, a turnaround after two years of double-digit gains.

The slowdown in mortgage lending is another example of how rising interest rates are happening in all corners of the economy. The Federal Reserve has already hiked interest rates twice this year in an effort to curb the highest inflation in decades, pushing up borrowing costs across the board. It also pushed up the 10-year US Treasury yield, which is closely tied to mortgage rates.

Higher mortgage rates can add hundreds of dollars to a household’s monthly mortgage payment and have forced some potential buyers to give up. A faster-than-expected rise in mortgage rates also accelerated the decline in refinances, the juggernaut that drove mortgage originations and industry earnings to record highs in 2020 and 2021. Refinances are expected to account for 33% of mortgage originations in 2022 , according to the Mortgage Bankers Association, up from 59% in 2021.

Overall, American consumers are sending mixed signals about how they feel. Many Americans are pessimistic about the economy, thanks to accelerating inflation that has increased the cost of groceries and gasoline. The US economy shrank 1.4% in the first quarter, its worst performance since the start of the pandemic. But households also spent on travel and entertainment, and both consumer spending and personal income rose in March.

Mortgage rates jumped about 1.5 points in the first quarter and have been rising ever since. Last week, the average rate for a 30-year fixed mortgage hit 5.27%, its highest level in almost 13 years.

Higher interest rates reduce the pool of borrowers who could reduce their monthly payments by refinancing. This group fell below four million in March, down from around 18 million in March 2021, according to mortgage data firm Black Knight Inc.

The combination of higher rates and steadily rising home prices has pushed monthly mortgage payments to their least affordable level since 2008, according to the Federal Reserve Bank of Atlanta. A median U.S. household needed 34.9% of its income to cover payments for a median-priced home in February, up from 29.2% a year earlier.

Americans who can afford to stay in the market are trying to mitigate rising mortgage rates by paying upfront fees to lower their rate or lock in a lower rate.

Americans also took out about $177 billion in auto loans in the first quarter, up 16% from the first three months of 2021. Much of that increase reflects higher car prices rather than an increase. of the number of loans made, economists at the New York Fed said. Automobile creations were down about $4 billion from the fourth quarter.

With the average 30-year mortgage rate hitting 5%, home ownership may now be out of reach for millions more Americans. Dion Rabouin of the WSJ explains the impact for potential buyers, sellers and the housing market. Illustration: Adele Morgan

Write to Orla McCaffrey at [email protected]

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