Home Equity Grows As The Composition Of (Fewer) Refinancings Shifts

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According to the Federal Reserve Board’s first quarter of 2017 release of its Financial Accounts of the United States report, household holdings of real estate, measured on a not seasonally adjusted basis, totaled $23.526 trillion in the first quarter of 2017, $1.597 trillion higher than its level in the first quarter of 2016.

Home mortgage debt outstanding, $9.813 trillion in the first quarter of 2017, rose by $252 billion over the same four-quarter period. As the change in the total value of household-held real estate exceeded growth in mortgage debt outstanding, total home equity held by households grew. Over the year, total home equity held by households rose by $1.346 trillion, 10.9 percent, to $13.714 trillion. Households’ home equity is now 58.3 percent of household real estate.

Although housing equity is expanding, applications for mortgage refinancings are lower. Between the third quarter of 2012 and the third quarter of 2014 applications for refinancings fell 73 percent. Refinancing applications rose somewhat over the second half of 2014, 2015, and the first half of 2016, coinciding with a decline in mortgage rates that took place during the same period. However, since the third quarter of 2016, applications for refinancings have fallen as rates have generally risen. The Mortgage Bankers’ Association expects fewer refinancing originations over all of 2017 relative to 2016.

Although applications for refinancings have shrunk, the composition of refinancing originations has shifted, likely reflecting both a decline in the proportion of refinancings used to lower the mortgage rate and an increase in the percentage used to cash out home equity. Since the third quarter of 2013, the proportion of refinancing originations, purchased by Freddie Mac, that resulted in no change to the loan amount has declined while the proportion of refinancings resulting in at least a 5 percent or higher loan amount, a proxy for cash-out refinancings, has risen. Moreover, for the first time since the recession ended, the proportion of refinancings resulting in at least a 5 percent higher loan amount, 49.3 percent, eclipsed the proportion of refinancings resulting in no change to the loan amount in the first quarter of 2017, 48.7 percent. Meanwhile, the proportion of refinancings resulting in a lower amount has remained small and constant

At the same time that the share of refinancings resulting in a 5 percent or higher loan amount has risen in recent years, the median ratio of the new mortgage rate to the old mortgage rate (the purple dotted line) has also increased from its 2013 low. However, a ratio of .81 indicates that, at the median, refinancings resulted in a 19 percent decrease in the borrower’s mortgage rate.

In contrast, over 2006 and 2007, the last period that the majority of refinancings resulted in a new loan amount that was 5 percent or higher than the old loan amount, the median ratio peaked at 1.10 indicating that, at the median, a refinancing resulted in a 10 percent increase in the mortgage rate.

In the years immediately following the recession, the majority of borrowers were refinancing their mortgage in order to lock in a lower rate. Between 2010 and 2013, the majority of refinancings resulted in no change to the loan amount but the median ratio of the new mortgage rate to the old rate fell below 1.0 and continued to decline. By 2013, the median ratio of the new mortgage rate following a refinancing relative to the old rate reached .66 indicating that the majority of refinancings were not changing the loan amount, but the median mortgage rate following the refinancing was approximately 33 percent less than the old mortgage rate.