Lower interest rates cause a jump in mortgage refinancing

By: Pierre Villere

As I have been saying for months now, the fear of a stalling economy coupled with the stock market correction in the Fall of 2018 shook up Federal Reserve Chairman Jerome Powell and his fellow Board Governors, and they made public pronouncements that the Fed would pause any rate hikes for the foreseeable future. Shortly thereafter, the Fed came back and added that they were open to considering a cut in rates depending on the economic metrics they monitor to guide them in those decisions.

Well, it worked. As has been widely reported in the popular business press, the mortgage market had one of its most significant quarters since the financial crisis in the second quarter of 2019, as falling rates prompted a flurry of refinancings and an uptick in purchases. The 30-year mortgage rate unexpectedly dropped to below 4 percent in May and has remained near its lowest level in three years, opening a window for borrowers who bought at higher rates to lower their payments … and for purchasers to jump in. I predicted this months ago, and it has had the effect I expected on the new and existing housing market.

And then at the end of July, in what was a landmark move, the Fed cut rates by 0.25 percent, bringing the Fed rate down from 2.50 to 2.25 percent. This was a big deal, because the Fed had not cut rates since the end of 2008 against the backdrop of a crashing national economy, which was almost 11 years ago. Chairman Powell suggested its move was a small adjustment meant to help the economy weather uncertainty, and while he left the door open to additional cuts, he said officials did not expect this to turn into the sort of deep cutting cycle that the Fed has done in the past to avert or offset recessions. He was clear that it was not the beginning of a long series of rate cuts, but was also quick to point out that it wasn’t just one either; their official statement said that “it’s appropriate to adjust policy to a somewhat more accommodative stance over time.”

Now with the first rate cut behind us, and the yield on the longer-term 10-year Treasury notes lingering just above 2 percent, the period of low rates stands to continue. And only two days later, speculation was rampant in the Wall Street and banking worlds that the continuing pressure Trump is exerting on China may force the central bank to cut interest rates more than it had hoped was necessary to protect the U.S. economy from trade-policy risks.

Falling rates are welcome news for lenders, who made $565 billion of mortgage loans in the second quarter, the most in more than two years. At that pace, originations could exceed $2 trillion, for only the third year since the financial crisis. The last time mortgage originations passed $2 trillion was in 2016, when benchmark Treasury yields hit record lows. A similar boost occurred in 2012, a year in which rates hit all-time record lows.

Refinancing accounted for roughly half of new mortgages, a boost from recent periods. For example, in 2018 when rates were rising, refinancings accounted for just 31 percent of mortgage business. Remember, a one-point change in either direction in a mortgage rate can add or subtract hundreds of dollars from monthly payments depending on the mortgage balance. But by comparison, refinance applications rose 43 percent in the second quarter from a year earlier, while purchase applications climbed 6.2 percent during that period.

Recent estimates indicate there are 8.2 million U.S. homeowners who would qualify for—and benefit from—a refinancing. That is a 6.3 million increase from when rates peaked in November 2018, which is a stunning statistic. With the prospects for a long, low interest rate environment, and the impact it will have on both residential and non-residential construction, the concrete industry should prosper well into the foreseeable future.

Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on Twitter – @allenvillere.