Mortgage Monitor Finds Modest Opportunity in Refi Market

According to a new report from Black Knight, now a part of Intercontinental Exchange, Inc., August home prices rose at an exceptionally strong seasonally adjusted rate of 0.68% from July 2023. Also, August’s non-adjusted gain, totaling 0.24%, was more than 60% larger than the 25-year same-month average. 

Black Knight further found that along with a lower starting point due to late 2022 price drops, August’s increase as enough to push the annual rate of home price growth up by 3.8%, up from 2.4% in July and 0.25% in May. 

According to the ICE Home Price Index (formerly the Black Knight HPI), August marked the third consecutive month of home price growth reacceleration after annual home price growth slowed to effectively flat earlier this year. 

"After essentially flattening earlier this year, year-over-year home price growth has been reaccelerating for the last few months," said Andy Walden, ICE VP of Enterprise Research. "Growth remained strong in August, with home prices up a seasonally adjusted +0.68% from July hitting yet another record high for the fourth consecutive month. It was widespread, as well; prices in nearly half of the nation's 50 largest markets climbed by +0.75% or more. Even on a non-adjusted basis, August's gain of +0.24% was more than 60% larger than the 25-year average for the month. Either way you look at it, the increase was sufficient to push annual appreciation up to a stronger-than-expected +3.8%. This marks three months of clear acceleration in the rate of growth at the national level, with annual HPA up from +2.4% in July and just +0.25% back in May. Likewise, August marked the second consecutive month in which annual HPA trended higher in every one of the 50 largest U.S. markets, mirroring the sharp reacceleration we're seeing at the national level. 

"Already baked-in price gains mean further acceleration may be on the horizon. If adjusted home prices were to freeze where they are now, it would result in annual HPA rising above 5% by year's end given the strong price increases seen earlier this year," Walden continued. "On the other hand, if the +0.64% per month seasonally adjusted price increases we've seen on average in 2023 were to continue, we'd be looking at nearly 8% year-over-year growth by December. All that said, closed sales from August would have typically gone under contract in July, when mortgage rates were 40-50 bps lower than today. As it stands, home affordability hit yet another 38-year low in September by way of spiking rates and prices, both of which could still serve to cool price gains as we move toward the end of the year." 

Mortgage origination activity remains overwhelmingly centered around purchase loans, which are expected to dominate the market through 2024 and should remain the primary focus of lenders. 

Nine of 10 borrowers who refinanced in August raised their interest rate to tap equity, with an average increase of 2.34 percentage points; simple "in the money" analytics miss this market almost entirely. 

Cash-outs are primarily being sought by borrowers with lower balances—$165K on average—who are looking to withdraw larger amounts of equity at lower rates than current HELOC offerings. 

Average cash-out credit scores are down more than 40 points in recent years, as higher credit borrowers who can qualify are likely opting for HELOCs to tap equity, leaving a lower credit score residual among cash-outs. 

Purchase lending is expected to continue to dominate the market through 2024, which should make it the primary focus for lenders. The October 2023 Mortgage Monitor finds that there is, however, modest opportunity in the refinance market, but it's defying traditional analysis. 

"Lenders hoping to engage with the constrained refinance market need to look beyond standard methods of identifying potential candidates," Walden added. "In fact, with nine of 10 August 2023 refinances involving the borrower raising their interest rate – with an average rate increase of +2.34 percentage points – simple 'in the money' analytics are missing this market almost entirely. Granular insight into the before-and-after-refinance picture is key to understanding who is transacting in today's rate environment – and more importantly, why."