14 million mortgages were refinanced during ‘pandemic boom.’ That makes life very difficult for home buyers

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The reverberations of the great pandemic mortgage refinance boom are still being felt across the housing market, making it increasingly challenging for prospective homebuyers to find affordable homes. With homeowners holding on to their ultra-low mortgage rates, housing inventory remains tight, impeding the buying process.

As the coronavirus pandemic took hold in 2020 and 2021, mortgage rates plummeted, enticing millions of homeowners to seize the opportunity to refinance. In early January 2021, the average 30-year mortgage rate dropped to a staggering 2.65%, according to Freddie Mac data.

The Federal Reserve Bank of New York estimates that approximately 14 million mortgages were refinanced during this "pandemic refinancing boom." This surge in refinancing was driven by factors such as robust household balance sheets and a heightened demand for housing, as stated in a recent blog post by the New York Fed.

The impact of refinancing was significant, with the average homeowner experiencing a monthly payment reduction of $220, according to the Fed. The majority of mortgages that underwent refinancing were originated from 2015 onwards, while older mortgages, particularly those originated before 2010, were the least likely to be refinanced.

The NY Fed's analysis revealed that homeowners with mortgage balances ranging from $400,000 to $500,000 were the most likely to refinance.

However, one of the consequences of the refinancing boom is that potential homebuyers are now facing significant challenges in finding available homes for sale. Homeowners are reluctant to give up their ultra-low mortgage rates and sell their homes. Not only are interest rates significantly higher today, with the 30-year rate surpassing 6%, but home prices have also remained elevated.

Data from Realtor.com indicates that new listings, representing the number of homes put up for sale, have decreased by 16% in early May compared to the previous year. Homeowners are disincentivized to sell due to higher borrowing costs and inflated home prices, which have surged by more than 36% since before the pandemic.

The reluctance of homeowners to sell is evident in the decline of sales for previously-owned homes, which fell by 22% year-over-year in March, according to the National Association of Realtors. The data for April home sales is yet to be released.

To overcome the limited options in the resale market, many buyers are turning to new construction homes. The National Association of Home Builders reports a 9.6% increase in new home sales in March. It is noteworthy that new construction now comprises one-third of the housing inventory, a significant deviation from the historical norm of new homes accounting for just 10% of the overall housing market.

The mortgage industry is also feeling the effects of the decline in refinancing activity. As fewer homeowners refinance, mortgage originations, including refinanced mortgages, have plummeted sharply. The NY Fed reports that mortgage originations in the first quarter of 2023 dropped to $324 billion, the lowest level since 2014.

The lack of interest in refinancing is understandable given the current interest rate environment. As of mid-May, the average 30-year mortgage rate stands at 6.35%, compared to 5.3% a year ago, according to data from Freddie Mac. The rise in interest rates between December 2020 and October 2022 was not only substantial but also historically significant. Rates surged from 2.68% in 2020 to 6.9% in 2022, marking the largest swing since the early 1980s, according to the NY Fed, citing data from Freddie Mac.

This abrupt shift in interest rates has made mortgage refinancing less appealing for homeowners. The allure of ultra-low rates has diminished, leading to a slowdown in refinance activity. Consequently, the mortgage industry anticipates a decline in business compared to the booming period of the pandemic.

For prospective homebuyers, the challenges are manifold. Limited housing inventory, combined with higher borrowing costs and inflated home prices, has created a highly competitive and challenging market. The scarcity of available homes, particularly in the resale market, has fueled bidding wars and increased competition among buyers.

In response to the constrained resale market, many buyers have shifted their focus to new construction homes. The increase in new home sales indicates a shift in preference, with new builds accounting for a larger share of the housing inventory. While new construction offers an alternative, it may not fully alleviate the challenges faced by buyers, as demand often outpaces supply in this segment as well.

Moving forward, it is essential for prospective homebuyers to navigate the current landscape with caution and a thorough understanding of market conditions. Partnering with experienced real estate agents who possess in-depth knowledge of the local market can prove invaluable in identifying suitable housing options and formulating winning strategies in competitive markets.

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