Mortgage originations plunged in the third quarter, according to data from ATTOM, a curator of national real estate data. Soaring mortgage rates have dampened buyer enthusiasm, leading to unprecedented price growth in 2021. Enthusiasm for refinancing has also cooled significantly. However, home equity line of credit (HELOC) originations have increased steadily over the past five quarters.
Key points to remember
- The latest data from ATTOM shows a sharp drop in purchase mortgages in the third quarter of 2022 compared to the same period the previous year.
- Refinancing issues are also collapsing, returning to pre-pandemic levels.
- Homeowners are flocking to HELOCs to tap into their home equity, leading to a steady increase in HELOC creations.
Soaring mortgage rates cool the housing market
The US housing market has been extremely hot in 2021, leading to a staggering 18.8% increase in house prices for the year.
But as inflation rates suddenly rose, so did mortgage rates. According to Freddie Mac, the average rate on a 30-year fixed mortgage stands at 6.61%, more than double the average of 3.10% a year ago.
The result is a sudden about-face by buyers and owners. According to ATTOM, 1.97 million mortgages secured by residential properties between one and four units were originated in the third quarter of 2022. This figure is down 19% from the second quarter of 2022 and 47% from in the third quarter of 2021, the largest annual number falls since 2001.
ATTOM data also shows that house prices are finally starting to fall, with the median amount borrowed to finance a home purchase dropping to its lowest level in three years, even as the median down payment also fell.
Homeowners are also refinancing their mortgages at a much slower pace. Home lenders issued 660,767 refinance loans in the third quarter, down 31% from the second quarter of 2022 and nearly 68% from the same period last year. This is the lowest quarterly total since the first quarter of 2019.
Refinancing activity should continue to decline as long as mortgage rates remain high.
Homeowners leverage their new capital through HELOCs
As home prices have skyrocketed in 2021, homeowners’ net worth has also increased. While it doesn’t make sense to refinance a mortgage below 4% with existing rates, homeowners aren’t leaving their equity where it is.
Instead of using cash-in refinance, homeowners are increasingly turning to HELOCs, which have seen their originations rise in five of the past six quarters. Lenders issued 364,921 HELOCs in the third quarter, up more than 5% from the second quarter and nearly 48% from the same period last year.
The main advantage of a HELOC is that it pays interest only while the loan is in its drawdown period, and borrowers only have to pay interest on the amount they draw on their line of credit. However, HELOCs generally have variable interest rates, which can fluctuate over time. Therefore, it is important to shop around and compare HELOC rates before applying and be careful with your draws to avoid overstretching yourself.