A spate of offers has flooded the agency mortgage bond market this year as a fall in lending rates sparked a wave of homeowner refinances. However, there are signs that relief may come.
Gross supply was already $ 1.2 trillion as of the end of June, a breakneck pace considering that the past decade has averaged $ 1.3 trillion a year. The 30-year mortgage rate has hit record lows repeatedly since the end of the first quarter – it hit 2.88% on Thursday. Federal Reserve policies, which brought interest rates back to zero and resumed quantitative easing due to COVID-19 and its subsequent lockdowns, certainly contributed to this.
The Fed has been buying mortgages at a rapid pace. Between March 16 and the end of June, the bank added nearly $ 788 billion to its balance sheet. With total gross supply at $ 905 billion from March to June, the sector has been able to reduce spreads back to pre-pandemic levels.
Most of this supply stream comes from refinancing, as American homeowners benefit from interest rates that are historically ridiculously low. However, refinancing usually shifts the balance of a loan from an old to a new mortgage pool. The net supply, which is mainly from new and existing home sales – the latter being sold at a higher price than the last sale – does not meet recent annual norms.
The range of new single-family homes is no longer what it used to be. In the past decade, the lowest building since at least the 1950s has been erected. As a result, even record lows have not shaken net mortgage supply. While Bank of America Corp. recently raised its 2020 net supply forecast to $ 260 billion, it's still in line with the annual average of $ 262 billion over the past four years.
Two leading indicators suggest that the refi wave may peak – the Mortgage Bankers Association refinancing index and the average size of a refinanced loan. Both are in the downtrend. The average refinanced loan size has dropped to $ 303,700, an 18% decrease from the March 6 high of $ 372,100 and a decrease below the trailing year-on-year average of $ 317,100.
In the week ending July 31, the refinancing index fell by 6.8% and since reaching the annual high on March 6, it has fallen by 43%.