Thursday, December 04, 2014

Mortgage Rates decline to 3.89%, No Significant Increase in Refinance Activity Expected

by Bill McBride on 12/04/2014 01:27:00 PM

A few months ago, there was some discussion of a possible "refi boom" due to falling mortgage rates. I argued then that that was unlikely.

Mortgage rates have fallen further, but rates are still far above the level required for a significant increase in refinance activity.

This morning Freddie Mac reported: Mortgage Rates Lower Across the Board

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates down from the previous week. At 3.89 percent, the average 30-year fixed-rate mortgage is at its lowest level since the week of May 30, 2013.
Mortgage rates and Refinance index
Click on graph for larger image.

This graph shows the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey® compared to the MBA refinance index. 

The refinance index dropped sharply last year when mortgage rates increased.  Historically refinance activity picks up significantly when mortgage rates fall about 50 bps from a recent level.

Many borrowers who took out mortgages last year can refinance now - but that is a small number of total borrowers.  For a significant increase in refinance activity, rates would have to fall below the late 2012 lows (on a monthly basis, 30 year mortgage rates were at 3.35% in the PMMS in November and December 2012.

Based on the relationship between the 30 year mortgage rate and 10-year Treasury yields, the 10-year Treasury yield would probably have to decline to 1.5% or lower for a significant refinance boom (in the near future). With the 10-year yield currently at 2.27%, I don't expect a significant increase in refinance activity any time soon.