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Housing Industry Continues To Shine Even As National Economy Slows

August 1, 2002

Mortgage Rates Fall, Home Values Grow, And Homeowners Reap The Benefits

McLean, VA - In the second quarter of 2002, 67 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages at least five percent higher in amount than the original mortgages, according to Freddie Mac's quarterly refinance review. This is in contrast to the second quarter of 2001, when 58 percent of refinanced loans had higher loan amounts and mortgage rates were up to 70 basis points higher than they were in the second quarter of 2002. In comparison, 60 percent of refinanced loans in the first quarter of 2002 had higher new loan amounts.

"Incredibly low mortgage rates continue to make refinancing an attractive option for homeowners," said Frank Nothaft, Freddie Mac chief economist. "Along with the falling mortgage rates in the second half of this year, the value of housing also continues to climb. This creates an environment that is conducive to taking cash out of the equity in the home when refinancing and that is exactly what many homeowners are doing.

"According to our calculations, the average refinancing homeowner reduced his or her mortgage rate in the second quarter by about one percentage point. That translates into a decrease of almost $90 per month on their mortgage payment or a savings of just over $1000 per year."

Freddie Mac's most recent quarterly economic forecast sees the 30-year fixed-rate mortgage rates (FRMs) remaining between 6.5 percent to 7.0 percent for the rest of the year. Presently, Freddie Mac's weekly mortgage rate survey shows the 30-year FRM averaging 6.34 percent, a more than 31-year low.

"We had expected the refinance share to begin falling back by now to finish the year around 30 percent of originations," stated Nothaft. "However, with both mortgage rates falling and home values appreciating nicely, many more homeowners are finding they can, in many cases, not only take some equity out of their home but also lower their monthly payment. Consequently, refinancing continues to make up a large portion of originations."

The extra cash continues to support consumer expenditures and investment in home improvements and renovations. In the first half of this year, homeowners with conventional, conforming mortgages took about $50 billion in equity out of their homes. At an annualized rate of $100 billion, this is a slightly slower pace than that set in 2001, when roughly $140 billion was cashed-out and turned back into the economy.

"However, total home equity grew by more than $500 billion in 2001, and by over $80 billion in the first quarter of 2002, so rising home values are simultaneously increasing the wealth of homeowners even as they turn some of that equity into cash," said Nothaft.

Freddie Mac's Conventional Mortgage Home Price Index shows the cumulative growth in the value of housing, on a national average, to be about 38 percent over the past 5 years. Freddie Mac's economists forecast an annualized growth rate of 4 percent to 5 percent for the rest of the year. The forecast indicates house-price growth will not be as robust as previous years, but will still grow at a rate higher than inflation.

Freddie Mac's quarterly refinancing review also found that the median age of the refinanced loan was 4.1 years in the second quarter of 2002, almost double the median age of loans refinanced in the second three months of 2001. Only about 10 percent of mortgages refinanced in the second quarter of 2002 had lower new loan amounts. The review also found that properties refinanced during the second quarter 2002 experienced a median house-price appreciation of 23 percent during the time since the original loan was made, up from 15 percent for loans refinanced in second quarter 2001."

Source: Freddie Mac

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