Sunday, June 3, 2018

Article on the Impact of Falling Mortgage Refinance Market

Since we do watch for any kind of potential "trigger" that could impact systemic stability, this article seems worth noting. It points out how rising interest rates are now starting to have a real impact on the mortgage refinance market. Below are a couple of excerpts and then a few added comments.


Back in the 1990s we did our first cash-out refi. And it was amazing. The bank lowered our monthly mortgage payment AND wrote us a check for $16,000. I told that story to everyone I met for months afterward, and they were, without exception, astounded.

That, in a nutshell, is the refi paradise in which homeowners have been living ever since. By continuously lowering interest rates, the Fed has in effect been cutting our taxes, enabling us to buy furniture, cars, vacations, you name it. Easy money, funneled through the housing ATM, was an amazingly efficient stimulus program.

But now it’s over  . . . . . 

"If being able to refinance your mortgage every few years is like getting a tax cut, no longer being able to refinance – while your property taxes and maintenance expenses are rising – is the opposite. Suddenly, owning a house is an expensive proposition rather than a source of free cash. The result won’t be pretty."   . . . . . .

My added comments: This article is very easy for most people to understand and see how this can impact their life directly. Rising interest rates make everything purchased with a loan more expensive of course. But this situation in the housing and refinance market is especially important to keep an eye on. 

As this article points out, rising mortgage rates not only reduce demand for new housing and first time home buyers, they also directly impact the refinance market that millions of people have been using to access additional spendable funds for years now. So not only does the refi market itself take a hit (this article shows this is now happening), the overall economy takes a hit as people have less money available to spend in general. This along with the potential for trade wars may somewhat offset the boost the US economy has seen from lower taxes and regulation. 

The refinance market is such a large market that I won't be surprised if we see this directly hit GDP fairly substantially eventually. It's just another systemic risk we need to keep an eye on. 

Also, if this does start to play out and the Fed reacts back to monetary easing to try and stave off the problem, we would expect markets to react to that as well. The US dollar could take a pretty big hit under that scenario.

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