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While nationally aggregated home prices and single-family homebuilding have proved fairly resilient, all things considered, through the recent interest rate shock, the mortgage market hasn’t been as fortunate.
In fact, the U.S. mortgage market is experiencing one of the biggest downturns in history.
Layoffs and mergers continue to mount in the mortgage industry, and mortgage purchase applications have been hovering around multi-decade lows since 2022.
The decline in mortgage purchase applications isn’t just due to priced out buyers; it also stems from the mortgage rate shock coinciding with decreased turnover among existing homeowners, known as the lock-in effect. Some would-be sellers can’t afford to sell and buy something else at current rates, while others simply refuse to trade their 2% or 3% mortgage rates for rates of 6% or 7%. Thus fewer mortgages are being issued.
Traditional refinancing is also still slumped.
John Downs, a mortgage advisor in the Washington, D.C. area, tweeted a few months ago explaining why this is such a unique mortgage downturn: “Economy good = people buy houses. Economy bad = people refinance houses. We [loan officers] win every time. Just not this time.”
Indeed, during the 2007-2011 housing bust, mortgage purchases (see chart above) fell off while refinancing (chart below) kept going. Right now, both sides are pinned down even as national home prices remain around all-time highs.
The silver lining for the mortgage sector?
This mortgage recession, in terms of transactions, is likely passing through some form of a trough. While we’re not seeing a recovery yet, we also aren’t seeing a bigger decline. Instead, we’re just hovering at low levels.
In order to see a real recovery in the mortgage sector, lower mortgage rates are needed.
That could spur both more refinancing and an easing of the “lock-in effect” along with increasing churn in the resale market.