The biggest refinancing boom in U.S. history may be finally coming to an end.
With refinancing applications slumping more than 20% last week, and nearly 80% in just three months from their all-time peak, some economists are declaring the end of the refinancing wave that has buoyed a struggling economy.
"You can definitely say the refinancing boom is over," said Drew Matus, an economist at Lehman Bros.
On Wednesday, the Mortgage Bankers Assn. of America said its seasonally adjusted gauge for applications to refinance loans fell 21.3% to 2,169 for the week ended Friday. The index has fallen eight straight weeks and is 78% below the record high of 9,977.8 set the last week of May.
The swift rise in mortgage rates since mid-June from their 45-year lows has closed the doors for homeowners looking to refinance mortgages at lower rates, which could have freed cash for other uses.
"That takes away the financial incentive for many families to refinance," said Frank Nothaft, chief economist at Freddie Mac, the No. 2 U.S. mortgage finance company.
Even if rates head lower again, that probably will not be enough to push refinancing back up toward the recent record level, analysts said.
"We think rates could drop by the end of the year," said Jay Brinkmann, vice president of research at the Mortgage Bankers Assn. "But we are not expecting a big surge in refinancing."
Interest rates, excluding fees, on 30-year fixed-rate mortgages, the home loan held by most Americans, averaged 6.22%, unchanged from the previous week but well above the low of 4.99% set in the second week of June.
The record refinancing boom began in April 2002, just months after the conclusion of a refinancing wave in 2001, Brinkmann said.
The financial markets lost faith in a rapid U.S. economic recovery last year even after a series of aggressive rate cuts by the Federal Reserve. Pessimism over the economy forced down U.S. Treasury yields, used to set many U.S. mortgage rates.
The combined economic effect of the two refinancing cycles has resulted in about $165 billion in spending on home improvements and investments and has helped Americans pay off about $85 billion in more expensive personal debt, according to industry estimates.
"It did a good job to help consumers to spend and to clean up their balance sheet," Lehman's Matus said.
Although demand for refinancing has fallen sharply in recent weeks, demand for loans to buy homes has dropped only slightly, supported by strong home sales and construction.
In July, sales of new homes dipped 2.9% to an annualized pace of 1.165 million from a record high of 1.20 million in June, while sales of existing homes hit a record annual rate of 6.1 million last month.
The Mortgage Bankers Assn.'s index of demand for loans for home purchases slipped last week to 375.5, down 3.6% from the previous week.