Mortgage lock volume jumped 15.36% in March month-over-month, according to a recent report from Mortgage Capital Trading (MCT), a capital markets advisory firm. The increase occurred in the face of affordability headwinds, like interest rates hovering just under 7%.
In a conversation with NMP, Andrew Rhodes, senior director and head of trading at MCT, discussed the surprising increase in volume within the context of broader economic conditions.
“Truthfully, I didn't think that we'd have that kind of continued growth and stability with those headwinds,” he said. “I know everybody talks about limited supply being an issue and rates being an issue, but the fact that we're still continuing to see incremental growth month-over-month is really surprising to me.”
MCT did hedge their surprising findings in the report, though. March’s higher lock volume reflected 8% growth year-over-year, mostly fueled by a 44% year-over-year surge in refinances. “It’s important to note that volumes remain on the lower end of the scale,” the report reads, “resulting in perceived significant month-over-month increases.”
Rhodes tempered his surprise as well, especially concerning the jump in refinance volume.
“I don't think that it's statistically significant enough to make that big of a difference in my opinion,” Rhodes said. “If you go from two to four units, that's a 100% increase, right? That's kind of why I'm discounting the refi numbers. I think over the last couple [of] months there is just not enough volume flowing through for us to really take it at face value. From my perspective," he continues, "it's good to see that there's still some people out there looking to buy."
What's more, overall economics don’t support a robust return in refinance volume anytime soon. As to why rate lock volume increased so much in March, Rhodes couldn't specifically say. "I was talking to somebody yesterday," he said, "and they were saying, ‘Well, maybe it's just the narrative from the LOs changing,’ saying, ‘Hey, rate cuts are on the horizon, let's get you locked into a rate now and then a year or two from now, we'll get you in a refi.’”
But, those conversations with borrowers about soon-to-happen rate cuts are not new. Rhodes said he’s been hearing that since October 2022 when temporary buy-downs were the hot conversation between borrowers and LOs.
Instead, this week’s disappointing inflation reading following last week’s stronger-than-expected jobs report kicked the can for rate cuts even deeper into 2024 – “if not next year, depending on what happens with inflation,” Rhodes said. “If we don't see inflation break over the next two to three months, I would definitely kind of push it out to 2025.”
Whether capital markets teams can do anything but wait for stronger inflation data, “the short answer is, ‘No.’”
“Take it back to when I started in 2005,” he explained. “The Fed wasn't in the mortgage-backed security market. That was pre-fallout of 2007, 2008, when the Fed stepped in. Since that point in time, the Fed has been in the market kind of dictating how rates are going to go in the mortgage market. I think that right now they're taking a step back and trying to correct that, but I think that they're still going to be in the market for the short-term, mid-term outlook, even though they don't want to be.”
But, everyone expects rate cuts will occur within the next two years, he says, so having the ‘buy-then-refi’ conversation with borrowers still holds merit. “If that actually comes to fruition or not, who really knows? But, I think that's a strong enough narrative to get a borrower to lock."
On account of the hot inflation reading, Rhodes said he anticipates April’s lock volume to drop from March, despite seeing “normalization” occurring in the market. By “normalization,” he means borrowers understanding that “a 6.5% or 7% rate isn’t the end of the world.”
He acknowledged, though, that the term “normalization” occludes many of the changes that have occurred in mortgages over the past five years – before, during, and after the COVID-19 pandemic.
“I think origination volumes are going to be more than last year. But if you're looking at it from a unit-count perspective, you'd have to go back to almost I think the late 90s for it to have that same kind of level. The fact that housing has increased in value so much is definitely leading towards higher overall origination volumes, but the number of counts going through each of the originators is less and less,” Rhodes said.
Rhodes added that normalization entails finding a balance “in terms of what's out on the market, what new originations are able to be coming through.” And for Rhodes, that includes the regular ebb and flow of purchases and refinances.
From a rate perspective, 6% mortgage rates would likely support balance in the market. “If the market goes down a little bit, you got some people on the higher end that could refi, you got some people on the lower end who are probably going to stay there unless they need to make a change, they need to take care of some credit cards, so they'll do cash out, take the equity and kind of pay that off.”
With so many borrowers in low-rate coupons, it could be the case that large amounts of existing inventory never return to the market when rates eventually fall, Rhodes said.
“In the new kind of world that we're in, doesn't it make more sense for people to try to continue on with the mortgage, get their house bought, and then try to get revenue from it instead of selling it and moving to another place?” Rhodes is beginning to take a closer look at whether this dynamic could play out, and if so, what the impact on overall market conditions would be.
Rhodes continued, “I do think that that's going to be a factor into the future. How many of these homeowners are actually going to stick out where they're at . . . keep the house that they currently have and try to get some revenue from it?”
