Results from the Mortgage Interest Rate Survey (MIRS) administered by the Federal Housing Finance Agency (FHFA) indicate that mortgage rates rose in February 2017*. Over the month, contract rates on mortgages used to purchase single-family newly constructed homes increased by 16 basis points to 4.18 percent. Since reaching a low of 3.54 percent in October 2016, contract rates reported by the MIRS have climbed by 64 basis points.
In response to higher rates, the most recent iteration of Fannie Mae’s Mortgage Lender Sentiment Survey, which covers the first quarter of 2017 and expectations for the second quarter, indicates that while mortgage lenders expect demand for GSE-eligible purchase mortgages to “go up” on net over the second quarter of 2017, the growth in purchase mortgage demand is expected to be lower.
The results of the survey motivated the authors to conclude that “demand growth expectations for purchase mortgages declined substantially, mostly attributable to unfavorable mortgage rates. The net share of lenders expecting increased purchase mortgage demand over the next three months for conventional mortgages fell to the lowest level recorded in any first quarter in the survey’s history.”
As shown in the figure above, on net, 50 percent of all mortgage lender survey respondents expect demand for GSE-eligible purchase mortgages to “go up” in the second quarter of 2017. The net share represents the difference between the percentage of lenders reporting that they expect demand to “go up” and the proportion expecting demand to “go down”. When compared to first quarter responses in the two previous years, the net share recorded in 2017 is considered low.
Mortgage banks and credit unions both recorded a year-over-year decrease in the net share expecting demand for GSE-eligible purchase mortgages to increase in the second quarter. Still, a majority on net expect demand to increase. The largest 4-quarter decline took place among depository institutions. In the first quarter of 2017, a net share of 33 percent of banks expect demand for GSE-eligible purchase mortgages to go up, below the 50 percent Overall and 25 percentage points less than its level in the first quarter of 2016**.
In its latest Outlook release, Freddie Mac notes that “With inventory tight, home prices outpacing incomes and interest rates headed higher, affordability has declined, putting a pinch on prospective homebuyers.” At the same time, they also note that “historically low mortgage rates and strong house price appreciation could push more existing homeowners to tap their equity in the form of cash-out refinances.” At the same time, since purchases of new homes, which accounted for approximately 10 percent of single-family home sales in 2016, are closely connected to trade up buyers, then house price appreciation and historically low rates are also supportive of new home purchases.
* To conduct this survey, FHFA asks a sample of mortgage lenders to report the terms and conditions on all single-family, fully amortized, purchase-money, nonfarm loans that they close during the last five business days of the month. The survey excludes FHA-insured and VA-guaranteed loans, multifamily loans, mobile home loans, and loans created by refinancing another mortgage.
** The chart below tells a nuanced story for government purchase mortgage demand.
Builders would be well advised to shop for forward mortgage commitments with two goals in mind. First, protect the sales backlog and, second, to keep sales rolling. Rather than a commitment for a finite interest rate, I recommend considering a cap rate commitment. With a cap rate commitment, the maximum interest rate is set. If market rates are higher than the cap rate just prior to closing, the buyer will get the cap rate. On the other hand, if market rates are lower than the cap rate just prior to closing, the buyer will receive the market rate. This type of commitment is effective and is far less costly than a fixed rate commitment.