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US Housing Refinance: Another Wrinkle To Help Explain The Surprising US Economic Resilience

Are the ultra low rates during the pandemic contributing to the "resilient" US economy we have written so much about?

We found the time to read some fascinating research by the New York Federal Reserve on the US housing market this week and some of their data was interesting in a way we had sufficiently appreciated.

There was a 7 quarter stretch of 2020 and 2021 where, as most readers will likely recall, the US housing market went nuts. There was a lot of zany stuff at the time, of course. The pandemic was quite an era on a few levels but even by comparison to, say, triple-masking or people Lysol-ing their groceries, US home prices stand out.

At the heart of all this, of course, were the exceptionally low interest rates made available by the Federal Reserve.

Now those rates have reversed and created a very unusual set of circumstances in the housing market which we have covered in depth around the "frozen" nature of the US housing market at present. People are understandably interested in what might gradually warm it up and/or what to watch for to see it shatter into a thousand shards of another "2008 crash."

As a reminder, some of our earlier work on this topic can be found here and here. The summary is that a crash is very unlikely at this time and our contention is that the US housing market will only undergo a thaw if and when we experience:

  1. low(er) rates

  2. Or a deep recession that create a large number of forced sellers via job losses (but a recession will, of course, create low rates....)

All fine and well and furthermore we have made the argument that the ultra-low rates of the pandemic and the preceding decade were not costless.

To the contrary, they distort markets and create future problems that we are often incapable of resolving without creating further, often larger, perversions. The now frozen housing market might be Exhibit A. The bank runs of March might be Exhibit B.

However, the staff New York Federal Reserve have uncovered and fleshed out an entirely different possibility that we have not discussed.

Namely they have pointed out that the refinancing boom has allowed millions of American homeowners to either reduce their mortgage payments or pull money out of their homes at tremendous low (now ridiculously low by comparison) interest rates.

How did this occur?

Well, during 2020 and 2021, around 14 million mortgages were refinanced at very advantageous mortgages rates. That number covers around 1/3 of existing outstanding mortgage balances in a 7 month span (2nd quarter of 2020 through end of 2021). A historically busy time for mortgage brokers!

That was huge for those homeowners and the number of refis dramatically outnumbered the number of purchases as you can see here:

In other words, the mortgage boom in 2020 and 2021 was far more about existing homeowners than new home buyers.

As the chart further makes clear that refinancing boom is now coming to an end but the repercussions of this boom will be with us for years and possibly decades to come.

Why?

Because for millions of homeowners, their housing costs have now declined significantly. In other words, they are richer.

Those who do not own their home, of course, missed out.

That alone is worth thinking about the next time that the pressure grows to drastically lower interest rates. For every household who successfully refinanced at a great new rate thereby saving themselves hundreds or even thousands of dollars a month in shelter costs there is someone not on the housing ladder who were not gifted this ancillary benefit of the pandemic.

Previously, we did well analyzing the unfairness part and we also covered the fact that the ultra-low rates would lead to a deeply frozen market, which would be a problem. What we missed and the good folks at the NY Fed did not, was what the possible impact that all of this housing refi activity would have on the economy itself.

In short, a lot of Americans have saved a bunch of money through lower payments. That was always unfair but now that money is being recycled back into the economy it is at least helping to support that economy for all. The average savings for those 14 million households was over $220-a-month and that money is showing up everywhere no doubt: in spending, in investment, you name it.

But that isn't all either.

Homeowners also extracted money from their home in the refinancing process. By that we mean that they borrowed against the value of their home, both the portion that they had already paid off and, just as critically, the amount the home itself has appreciated.

As you may recall, house prices went up an average of 35% in 2021 alone. That along with the years beforehand ensure that there was a lot of added capital that you could take out of your home via a Home-Equity-Line-Of-Credit or HELOC.

We did not realize either the number of HELOCs that were taken out or the amount of capital that this has pumped back out into the economy. It isn't a small amount!

Across those 7 quarters:

  • 5 million borrowers extracted a total of $430 billion in home equity from their homes.

  • Further, 9 million didn't extract any equity but instead used the refinancing process to lower their mortgage bill by $24 billion annually.

Add it all up and it is very likely that, among other distortions, that this massive amount of mortgage refinances are now doing their part to support the economy in ways that, of course, we wouldn't normally expect.

Why is that?

Well, typically of course mortgage rates are not at record lows right before we begin to hike interest rates at the fastest pace ever. We had an unbelievable couple swings in interest rates and the most important part was the speed therein.

We had a record fall in rates followed by a record acceleration in the other direction, all across a short 40 months, or so. Typically, you don't have a huge low in interest rates right as the housing market is flying.

That swing is critical to our current situation and also very unusual. We are still experiencing and learning of all of its consequences. Many of them, as this newsletter has covered extensively, are quite negative.

But some are positive!

As the report itself concludes:

The end of the most recent exceptionally low interest rate period leaves homeowners somewhat disincentivized to sell or change properties: Owners now looking to move will face increased borrowing costs and higher prices, with current home prices being more than 36 percent higher than they had been pre-pandemic. The improved cash flow generated by the recent refinance boom will potentially provide significant support to future consumption.

Government policy "doing stuff" can feel positive when it occurs, especially when there is a pandemic but it can also leave an under-discussed legacy that creates significant distortions and long running imbalances. It can also create or deepen inequalities between groups throughout society.

Last week we discussed that the current debates around US government spending and the fiscal deficit risk exposing and exacerbating many often unstated divides in our society and not just between Democrats and Republicans.

In many ways those ideological positions pale between the divide between the housed and unhoused or, whisper it quietly, older and younger Americans who find themselves on very different sides of a crazy 7-month period in US interest rates.

That chasm is a subject we will return to in the near future but for now it is past time to turn to an older theme of ours that has suddenly returned with vengeance.

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