The Effect of Higher Interest Rates
on the Housing and Mortgage Markets
Laurie Goodman, Urban Institute
Frank Nothaft, CoreLogic
Marietta Rodriguez, NeighborWorks America
Saul Sanders, Shellpoint Partners LLC
Stuart Pratt, CoreLogic
February 22, 2017
The Effect of Higher Mortgage Rates
on the Housing and Mortgage Markets
Urban Institute-CoreLogic Sunset Seminar
Frank Nothaft, CoreLogic SVP & Chief Economist
February 22, 2017
©2017 CoreLogic, Inc. All rights reserved. Proprietary.
Effect of Higher Mortgage Rates
Housing market effects:
 Affordability lessens
 Owner mobility may lessen, for-sale inventory remains lean
Mortgage market effects:
 Single-family originations: less refinance
 New refi mix: more FHA-to-conventional, cash-out, longer-term
 Credit risk: relatively low on debt outstanding
 New loans: credit box may open up, fraud risk may increase
3
©2017 CoreLogic, Inc. All rights reserved. Proprietary.
Mobility Rate by Year After Purchase
Percent of home buyers that sell by length of ownership, 1976-2016
7%
6%
5%
4%
3%
2%
1%
0%
0
3
6
9
12
15
18
Number of Years
Source: CoreLogic
21
24
27
30
4
©2017 CoreLogic, Inc. All rights reserved. Proprietary.
Resell Rate Higher when Rates Move Lower
Percent of home buyers that sell by length of ownership, 1976-2016
7%
Rates down 1.5%
6%
5%
Rates down 3%
4%
3%
2%
Rates up 3%
Rates up 1.5%
1%
0%
0
3
6
9
12
15
18
Number of Years
Source: CoreLogic
21
24
27
30
5
©2017 CoreLogic, Inc. All rights reserved. Proprietary.
Rising Rates May Be A Hurdle for Resales
Percent of home buyers that sell by length of ownership, 1976-2016
7%
Rates down 1.5%
6%
5%
4%
3%
2%
Rates up 1.5%
1%
0%
0
3
6
9
12
15
18
Number of Years
Source: CoreLogic
21
24
27
30
6
©2017 CoreLogic, Inc. All rights reserved. Proprietary.
Mortgage Originations: Drop in 2017 and Stable in 2018
Single-family Mortgage Originations (Billions of U.S. dollars)
$2,400
$2,000
$1,600
---Forecast--- 2016 to 2017:
Total: - 18%
Refi: - 45%
Purch: + 6%
Refinance
$1,200
$800
Purchase
$400
$0
2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Originations are an average of the latest projections released by Mortgage Bankers Association, Fannie Mae, Freddie
Mac and Zelman & Associates. Forecast for Mortgage Bankers Association, Fannie Mae, Freddie Mac as of January 2017.
Forecast for Zelman & Associates as of December 2016. 2010-2015 are benchmarked to HMDA. Originations exclude HELOCs.
©2017 CoreLogic, Inc. All rights reserved. Proprietary.
Refi Booms End Quickly As Rates Come Off Lows
Cash-out refi and FHA-to-conventional refi continue
Refinance Share of Lending (Percent)
90
1992-93
Boom
1998
Boom
30-Year Fixed-Rate Mortgage Rate (Percent)
2001-04
Boom
2009-13
Boom
Forecast
11
80
10
70
9
60
8
50
7
40
6
30
5
20
4
Refinance Share of Lending (Left)
10
1988
Fixed Mortgage Rate (Right)
3
1993
1998
2003
2008
2013
2018
Source: Home Mortgage Disclosure Act, Freddie Mac Primary Mortgage Market Survey®, CoreLogic;
2017-2018 forecast is average of MBA, Freddie Mac, Fannie Mae and IHS Markit (FRM rate only) projections.
8
©2017 CoreLogic, Inc. All rights reserved. Proprietary.
“In the Money” Refinanceable Loans Has Dwindled
11% have rate >5.25%, but 1-in-5 of these are in default
Cumulative Share of Active Balance by Interest Rate
100%
11% of Active UPB Has a
Rate > 4.25% + 100 bps
80%
60%
40%
Current Rate +100 bps
20%
0%
0%
1%
2%
3%
4%
5%
6%
7%
8%
Interest Rate on Mortgage Debt Outstanding
Source: CoreLogic TrueStandings
9
9%
10%
or higher
©2017 CoreLogic, Inc. All rights reserved. Proprietary.
FHA-to-Conventional Refinancing A Bright Spot
250,000 FHA to Conventional Refinances Expected in 2017
Share of Refinance
Number of Refinances
12%
60,000
FHA Drops MI
Cancellation
50,000
10%
40,000
8%
30,000
6%
20,000
4%
10,000
2%
0%
2000
2002
2004
2006
2008
2010
2012
2014
2016
FHA to Conventional Refinances - Left Axis
FHA to Conventional Refinance as a Share of Refinance - Right Axis
Source: CoreLogic
10
©2017 CoreLogic, Inc. All rights reserved. Proprietary.
Effect of Higher Mortgage Rates
Housing market effects:
 Affordability lessens
 Owner mobility may lessen, for-sale inventory remains lean
Mortgage market effects:
 Single-family originations: less refinance
 New refi mix: more FHA-to-conventional, cash-out, longer-term
 Credit risk: relatively low on debt outstanding
 New loans: credit box may open up, fraud risk may increase
11
©2017 CoreLogic, Inc. All rights reserved. Proprietary.
Where to find more information
Look for regular updates to our housing forecast, commentary and
data at
http://www.corelogic.com/blog
@CoreLogicEcon
@DrFrankNothaft
The views, opinions, forecasts and estimates herein are those of the CoreLogic Office of the Chief
Economist, are subject to change without notice and do not necessarily reflect the position of
CoreLogic or its management. The Office of the Chief Economist makes every effort to provide
accurate and reliable information, however, it does not guarantee accuracy, completeness, timeliness
or suitability for any particular purpose.
CORELOGIC and the CoreLogic logo are trademarks of CoreLogic, Inc. and/or its subsidiaries.
12
©2017 CoreLogic, Inc. All rights reserved. Proprietary.
Sunset Seminar
Laurie Goodman
CoDirector, Housing Finance Policy Center
Urban Institute
@MortgageLaurie
February 22, 2017
The Effect of Higher Interest Rates on the Housing
and Mortgage Markets
• Higher rates lead to a choking off of refinancing activity
• Higher rates lead to mortgages trading with longer durations than models would
predict, due to secular decreases in mobility.
• History indicates that, rising rates have been associated with increases in
nominal home prices, despite decreased affordability. And, while less affordable
than we were several months ago, payments are still affordable by historical
standards. Moreover, a supply/demand imbalance gives a further boost to home
price appreciation.
• We would expect some loosening of the credit box, both because of higher rates
and less enforcement of the false claims act. In addition, this administration may
be amenable to changes which make mortgage origination and servicing less
cumbersome.
• FHA modifications will become more difficult to execute
14
Rising rates have choked off refinancing activity
PMMS rate vs. Refi Activity Index
PMMS
MBA Applications Survey: Refi Activity Index
PMMS rate
Refi Index
5.00
7000
4.80
6000
4.60
4.40
5000
4.20
4000
4.00
3.80
3000
3.60
2000
3.40
1000
3.20
3.00
2011
0
2012
2013
2014
2015
2016
Sources: Freddie Mac Primary Mortgage Market Survey (PMMS), Mortgage Banker Association (MBA), and Urban institute
15
As rates have risen, most of the mortgage universe
has become non-refinanceable
Percent Refinancable vs. WAC
wac
%refinancable
WAC
Percent
9
8
7
6
5
4
3
2
1
0
90%
80%
70%
60%
50%
40%
30%
20%
10%
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
0%
Sources: eMBS, Freddie Mac Primary Mortgage Market Survey (PMMS), and Urban institute
16
There has been a secular decline in interest rates
since 1981
30-Year Fixed Rate Mortgage Rate and 10 Year Treasury Rate
PMMS (%)
10 yr Treasury Rate
PMMS Rate (Percent)
20
18
16
14
12
10
8
6
4
2
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
0
Sources: Freddie Mac Primary Mortgage Market Survey (PMMS), Credit Suisse, and Urban institute
17
Payment Rates May Slow More than Expected as
Geographic Mobility is Down
Percent
10
Percent Movers within Past Year--Owners
Percent Movers Within Past Year– Renters
40
9
35
8
30
7
25
6
5
20
4
15
3
10
2
5
1
0
0
1988
1992
1996
2000
2004
Source: U.S. Census Bureau, Current Population Survey
2008
2012
2016
1988
1992
1996
2000
2004
2008
2012
Source: U.S. Census Bureau, Current Population Survey
18
2016
Historically, Rising Rates have been Associated with Increases in
Nominal Home Prices, Despite Decreased Affordability
recession
YOY HPI Growth (Percent)
PMMS YOY
HPI YOY
REAL HPI YOY
PMMS YOY (Percent)
20%
6%
15%
4%
10%
2%
5%
0%
0%
-5%
-2%
-10%
-4%
-15%
-20%
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
-6%
Source: CoreLogic, Freddie Mac Primary Mortgage Market Survey (PMMS), U.S. Bureau of Labor Statistics (BLS), and Urban Institute.
Note: PMMS YOY = Year over year change in 30 year fixed rate mortgage rate based on Freddie Mac Primary Mortgage Market Survey (PMMS).
HPI YOY = Year over year growth rate of nominal home price Index. REAL HPI YOY = Year over year growth rate of home price Index in 2000 dollars.
19
Supply/Demand Gap 2015
(Thousands of Units)
Private Residential
Completions
1-4 family
5+ family
Total
657
310
968
Manufactured Houses
69
Gross New Supply
1037
Less: Obsolescence Rate*
418
Net New Units
619
Household Formation
1050
Supply/Demand Gap
-431
* 0.31% of existing stock
Sources: US Census Bureau, U.S. Department of Housing and Urban Development(obsolescence rate)
20
The Supply/Demand Picture, A Time Series
Source: US Census data, Urban Institute Calculations
Home Prices are Still Affordable in a Reasonable
Historical Context
National Housing Affordability Over Time
Median sales price
Max affordable price
Max affordable price at 5.5% rate
Housing Prices ($ thousands)
320
$317,577
Credit
Bubble
270
$236,000
220
170
Sources: CoreLogic, US Census, Freddie Mac and Urban Institute.
Note: The maximum affordable price is the house price that a family can afford putting 20 percent down,
with a monthly payment of 28 percent of median family income, at the Freddie Mac prevailing rate for 30-year
fixed-rate mortgage, and property tax and insurance at 1.75 percent of housing value.
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
120
October 2016
22
Rate Rises are Often Accompanied by a Relaxation
of Credit Standards
Total Original Average Original Credit
UPB ($)
UPB ($B)
Score
Original Combined
Original Loan-to- Original Debt-to- Weighted Average
Loan- to-Value
Value (LTV) Ratio Income (DTI) Ratio Coupon (WAC)
(CLTV) Ratio
Year
Loan Count
1999
1,095,017
137.9
125,942
712
77.6
77.5
33.2
7.3
2000
786,272
103.7
131,824
712
78.8
78.2
35.2
8.1
2001
1,755,361
259.5
147,803
715
76.2
75.5
33.7
7
2002
1,682,959
261.7
155,507
718
74.8
73.8
34
6.5
2003
1,927,030
311.2
161,474
725
73.5
72.1
32.8
5.7
2004
1,127,941
188.1
166,761
718
75.3
73.6
35.6
5.8
2005
1,691,627
289.3
171,017
725
72.2
70.5
36.3
5.8
2006
1,260,389
226.5
179,724
724
74.2
71.7
37.6
6.4
2007
1,220,022
223.8
183,469
725
75.8
73
37.8
6.3
2008
1,179,071
240.2
203,676
742
72.5
70.7
37.2
6
2009
1,973,348
423.1
214,415
763
67.7
65.9
32.3
4.9
2010
1,269,786
265.1
208,760
764
68.6
67.1
32.2
4.6
2011
952,698
207.8
218,075
765
69.3
67.9
32.3
4.3
2012
1,327,587
295.3
222,435
767
69.9
68.6
31.4
3.6
2013
1,297,019
282.9
218,109
760
72.5
71.4
32.5
3.8
2014
967,258
212.2
219,368
752
76.8
76
34.4
4.3
2015
1,003,423
159.8
230,480
754
75
74.2
34.3
3.9
Total
22,516,808
4,159.40
184,723
740
72.9
71.5
34.1
5.4
Sources: Freddie Mac Single-Family Loan Level Dataset Summary Statistics
23
All handouts from today’s event can
be found at www.urban.org/events