A surge of refinancings at record low interest rates today could mean a dearth of homebuyers applying for mortgages tomorrow.
The purchase side of the market is already moribund, reflecting the weak economy. Demand for purchase loans is at its lowest level since 1996.
Lenders are busy handling the deluge of refi applications, which now make up 80% of all loan applications. But some are concerned that ultralow interest rates — the 30-year fixed rate is now averaging below 4.5% — will dampen future purchases by discouraging homeowners from moving house when rates are higher. Such a scenario would depress sales in three to five years, even if a more robust economic recovery were underway by then.
"We're having the biggest sale in the history of real estate and nobody is buying," lamented Scott Stern, the chief executive of Lenders One, a cooperative of independent mortgage banks. "The short-term benefit of getting everybody to refinance does have a consequence."
When the Mortgage Bankers Association revised its forecast for home loan originations in July, it had to consider this phenomenon, known in the industry as "lock-ins," said Michael Fratantoni, the trade group's vice president of research and economics.
Dan Cutaia, the president of capital markets and risk management at Fairway Independent Mortgage Corp. in Sun Prairie, Wis., said it is impossible to model for the impact of low interest rates on future sales.
"The fear of future sales demand being cannibalized is one that comes up in every refi boom," Cutaia said. "And sure enough, when rates rise, volume goes down. There seems to be some rationale that low, low rates will result in less activity as a result of current homeowners staying put, so to speak."
Stern argued that the current housing downturn is different from past ones because several large segments of consumers likely will be shut out of the real estate market for many years to come.
The biggest segment is the 31 million people currently unemployed or underemployed, which includes those who are working part time and those who want a job but have given up trying to find one, according to the Department of Labor's Bureau of Labor Statistics.
Then there are the 11.2 million homeowners with negative equity, according to CoreLogic, a Santa Ana, Calif., analytics provider. Since the balance of their mortgage is greater than the appraised value of their home, such borrowers are unable to sell or move up (though new government programs could help some refinance).
Another 6 million homeowners have been foreclosed on in the past three years and up to 3 million are headed to foreclosure this year, according to RealtyTrac Inc., a Irvine, Calif., data firm. Most of those homeowners will be ineligible for new mortgages for as long as five years.
Among those who have escaped foreclosure, as many as 3 million homeowners have loan modifications with rate reductions lasting five years, giving them a disincentive to uproot.
Of course, a wide range of factors, not just interest rates, drive home purchases. Savings, family size, school locations, changing neighborhoods and even traffic patterns influence whether someone will buy a home, said Jim Vogel, head of fixed-income research at First Horizon National Corp.'s FTN Financial Capital Markets Corp.
The paltry level of homebuying now "is an understandable concern," Vogel said, but worrying whether homeowners will buy in the future may be "shortsighted."
A large segment of consumers are in the process of deleveraging while others are struggling to simply maintain their income.
"We've gone through a trauma and we have to reload over the course of years to create that next group of conforming loan-eligible buyers," Vogel said. "They have to rebuild the savings pool for down payments."
Jim Coffrini, the president of Sierra Pacific Mortgage Co. Inc. in Sacramento, said he hopes the current refi boom lasts as long as possible, perhaps into early next year. "When it goes away, it's not going to be pretty," Coffrini said. "This housing market is sad. Everybody is afraid."
With the expiration of the homebuyer tax credit in April, he said, many potential purchasers retreated from the housing market — particularly investors who are concerned about the so-called shadow inventory of 5 million to 7 million homes that are delinquent but not in foreclosure.
"If there's a flood of inventory out there, with that overhang, there is money sitting on the sidelines because they're worried about another drop in home prices," Coffrini said.
In its July forecast, the MBA projected home loan originations would fall 30%, to $1.48 trillion this year. Next year, originations are forecast to hit $1.15 trillion, which would be on par with the industry's showing in 2000, when it produced $1.14 trillion of mortgages.
Home purchases are expected to fall 7%, to $686 billion this year, the trade group said, and will not rebound significantly until 2012. While refis are sustaining the current market, they are expected to drop 41%, to $797 billion this year, the MBA said.
Many home sales that would have more naturally occurred later in the year "were pulled into spring" by the tax credit, Fratantoni wrote in an e-mail.
"The extremely weak job market is either directly preventing people from buying, or indirectly, due to fear about the job situation," he wrote. "Affordability is determined by three components: mortgage rates, home prices and household incomes. Although mortgage rates are at record lows, and home prices are much lower than they were a few years ago, incomes are lower as well."
Stern said lenders should do a better job of promoting low rates in the current environment. "This is the mortgage industry equivalent of Cash for Clunkers," he said. "I will know there's a recovery when people start buying houses."