The American housing market underwent a significant transformation between the second quarter of 2020 and the fourth quarter of 2021. Thanks to a notable 200 basis point decrease in mortgage rates, approximately 14 million homeowners made the decision to refinance their mortgages, as reported by the New York Fed. This refinance boom resulted in about one-third of outstanding mortgage balances being refinanced, signifying a substantial shift in the housing landscape. Moreover, an additional 17% of mortgages were refreshed through home sales, according to the New York Fed's research.

Homeowners' Reluctance to Sell: Interestingly, this refi boom has created a situation where 50% of mortgage-holding homeowners in America have little incentive to sell their properties. The current housing market is witnessing home prices that are 36% higher than pre-pandemic levels, coupled with a significant increase in financing costs. These factors have made homeowners hesitant to give up their current low mortgage rates and enter the market as sellers.  

A Nation in Limbo: Homeowners in Holding Patterns: Many households find themselves in similar holding patterns. In a recent survey by Realtor.com, 82% of potential sellers expressed feeling "locked in" by their current low mortgage rates. This sentiment echoes the broader situation where homeowners hesitate to make a move due to their favorable financing conditions.

The COVID refi boom has had a significant impact on the housing market, leaving lasting effects on homeowners across America. Mortgage lenders are facing challenges as their customer base shrinks, and real estate brokerages are experiencing reduced transaction volumes. This period will be remembered as a turning point in housing history, as homeowners grapple with the dilemma of whether to hold onto their low mortgage rates or take advantage of soaring home prices.

In other words, homeowners are reluctant to sell their homes due to the high mortgage rates and elevated home prices. The current 30-year mortgage rate is above 6%.

The Refinance Boom and Its Characteristics: The chart below provides a breakdown of mortgage originations into purchase and refinance mortgages. The COVID refinance boom, observed from the second quarter of 2020 to the fourth quarter of 2021, was driven by a decline in mortgage interest rates of nearly 200 basis points. This recent boom in refinancing differed from earlier ones in several ways. Firstly, interest rates were historically low during the pandemic years, prompting homeowners to take advantage of these rates by extracting equity, reducing monthly payments, or shortening mortgage terms. Secondly, the rebound in mortgage interest rates, after reaching record lows, was historically steep, putting an end to the surge in refinances. Lastly, homeowners had high levels of home equity leading into the pandemic, and as home prices continued to rise, many borrowers tapped into this equity.

‍

Approximately one-third of outstanding mortgage balances were refinanced during the refi boom period, and an additional 17% of mortgages were refreshed through home sales. However, as rates rose by 400 basis points from historically low levels, incentives to refinance diminished, resulting in a drop in the refinance rate.

Cash Out or Cash Flow? During the refi boom period, an estimated $430 billion in home equity was extracted through mortgage refinances. The pace of equity extraction slowed down when mortgage rates began to climb, reaching historic lows in the first quarter of 2023. While there was a noticeable pickup in cash-out refinances, it was not as consequential as the refi boom of 2002-2005 when considering its share of income.

Examining Who Refinanced: Analyzing the characteristics of mortgages refinanced during the pandemic reveals some key insights. Older vintage mortgages, originated before 2010, were the least likely to be refinanced, with less than 9% of these mortgages being refinanced. Mortgages originated between 2010 and 2014 had a refinancing rate of about 17%, while nearly a third of mortgages from 2015 and later vintages were refinanced during the relevant quarters.

There is a correlation between the remaining balances of mortgages and the likelihood of refinancing. Higher balances make refinancing more advantageous since the gain from refinancing is proportional to the refinanced balance. The propensity to refinance declines after reaching a balance of $500,000.

Conclusion: The COVID refi boom had a significant impact on American homeowners, reshaping the housing market. Homeowners faced a dilemma as they weighed the benefits of low mortgage rates against soaring home prices. This period marked a turning point in housing history, with mortgage lenders and real estate brokerages grappling with the challenges of reduced customer bases and transaction volumes. As the refi boom tapered off, homeowners were left with the decision of whether to hold onto their low mortgage rates or seize the opportunity presented by rising home prices.

‍