The most successful hedge fund of the pandemic era is the US homeowner. Interest rates plunging to near-zero and soaring house prices led Americans into a frenzy of mortgage refinancings. These deals allowed them to either slash their monthly payments or withdraw equity from their homes.
New research from the Federal Reserve Bank of New York shows quarterly refinancing volume soared from about $100bn in 2019 to as much as $700bn during the pandemic. More than $400bn of aggregate equity was extracted, according to the Fed, or $82k per cash-out mortgage. Most, however, chose to lower their monthly payments, on average by $220.
For most Americans, the single most valuable component of wealth is their residence, usually purchased with 30-year, fixed-rate mortgages at a 75 per cent loan to value. These refinancing booms occur occasionally, researchers note, creating substantial amounts of wealth. Also among the big winners were retailers such as Home Depot, Lowe’s and other purveyors of big-ticket goods.
But as the Fed notes, interest rates have spiked dramatically with benchmark mortgages going from under 3 per cent to about 7 per cent, a sea change that will continue to make waves in the economy.
Closed loan volumes and revenues for industry leader Rocket Companies fell more than 60 per cent in 2022, year on year. Rocket listed its shares in 2020 at $18 and they have since descended to roughly $8.
The distributional effects of these swings in interest rates is becoming clearer. Homeowners happy with their present locations are the big winners. Home Depot noted that while 40 per cent of US homes are owned outright, almost all mortgages outstanding have rates of 5 per cent.
No surprise that data on home sales released on Thursday revealed April volume was down 23 per cent. Those keen to join that hedge fund crowd, and buy into the housing market, are stuck out in the cold.
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