Home refinancing expected to slow in 2003
By Simon Kennedy
Bloomberg News Service
WASHINGTON — The wave of home refinancings that bolstered the U.S. economic recovery is showing signs of ebbing next year as mortgage rates start to rise, house-price appreciation slows and the number of potential borrowers shrinks.
Homeowners will take out $751 billion in home loans next year to repay older, costlier debt, often taking cash out of equity in their homes, the Mortgage Bankers Association estimated. That would be just over half the projected record of $1.4 trillion this year and down from $1.2 trillion in 2001. Mortgage rates may rise from 30-year lows as the economy recovers.
"The net effect of less refinancing next year is less stimulus for the economy," said David Berson, chief economist at Fannie Mae, the largest buyer of mortgages.
Makers of autos, home furnishings and other goods may have to work harder for sales as consumers' supply of new cash runs out. And until a recovery takes stronger hold, some consumers remain worried about their jobs. U.S. employers last month said they would cut 157,508 positions, down from 176,010 in October, according to the placement firm Challenger, Gray & Christmas Inc.
Goldman, Sachs & Co. estimated that home-equity withdrawals, or "cash outs," accounted for half the rise in household spending since 2000. The boom fueled a 22 percent increase this year in the stock value of Countrywide Financial Corp., the largest mortgage lender.
Federal Reserve Chairman Alan Greenspan last month said money consumers saved from refinancing helped counter the effect of this year's 19 percent decline in the Standard & Poor's 500 Index. That has assisted an economy struggling to escape last year's recession, he said.
"A dollar of equity extracted from housing has a more powerful effect on consumer spending than does a dollar change in the value of common stocks," Greenspan said in congressional testimony Nov. 13.
The confluence of falling interest rates and rising home values that fueled the boom is coming to an end, according to projections by the National Association of Realtors and the Mortgage Bankers Association.
"People who haven't refinanced already are running out of reasons to," said Phil Colling, an economist at the Mortgage Bankers' Association.
Economists expect interest rates to increase next year as economic growth rises above 3 percent. The average weekly rate on a 30-year fixed mortgage monitored by No. 2 mortgage buyer Freddie Mac dropped from 8.64 percent in May 2000 to a record low of 5.94 percent last month. The rate has since rebounded to 6.13 percent, and economists, including those at Freddie Mac, predict it will rise to almost 7 percent a year from now.
The monthly payment on a 30-year, $200,000 mortgage at 7 percent is $1,330, or $130 a month more than a 6 percent loan.
The pool of those willing or able to refinance has dwindled as homeowners raced to lock in low rates. Refinancings accounted for a record 70 percent of all mortgage applications in the fourth quarter of 2001, according to the Mortgage Bankers Association. By the end of 2003, such applications will decline to 25 percent, the group said.
"People eager to refinance will already have done it," said Ethan Harris, co-chief economist at Lehman Brothers Inc.
Signs of a retrenchment are already evident. The percentage of borrowers taking out cash when refinancing fell in the third quarter to a four-year low, according to Freddie Mac. The number of mortgage applications dropped 14.1 percent in the penultimate week of November from a record in early October.
An October poll by the Cambridge Consumer Credit Index found that of those people refinancing or intending to do so, 20 percent said they would use their new savings to make new purchases; 35 percent said they would pay down debt; and 31 percent pledged to save more.
"People are much more cautious now and consolidating their money rather than looking to spend it," said Allen Grommet, senior economist for the index. "Times are changing."
