Q3 2024 Forecast Update: The Boon and the Bane of the Refi Boom

During the Great COVID Refinance Boom of 2020/2021, mortgage interest rates fell to all-time lows. Millions of homeowners refinanced their mortgages, resulting in enormous monthly savings for homeowner households that have continued to support the economy long after the refi boom ended.

We believe that the refinance boom has been an underappreciated contributor to the strength of the economy over the last few years. Unfortunately for those in the mortgage origination business, that strength has helped keep interest rates higher for much longer than most forecasters expected — including us. That has resulted in the mortgage originations of last year, and most likely, this year, being among the lowest so far this century.

Our Forecast Update

With that introduction as a backdrop, iEmergent has updated our mortgage originations forecast. Because interest rates, particularly mortgage interest rates, have remained as high as they have, for as long as they have, and because home prices have not come down, housing unaffordability continues to be a crushing constraint on purchase mortgage originations. 

For the first part of this year, purchases tracked below last year’s pace. We now expect that by year end, 2024 purchase mortgage originations loan counts will have declined, although average loan balance increases will offset that decline to result in a low 3.5% gain in dollar volume from last year. However, mortgage interest rates have come down a bit recently and are expected to decline further by year end. The Fed’s 0.5% rate reduction on September 18 may help accelerate that movement. That mortgage rate decline has been enough to accelerate refinance originations already, and by year end, we expect 2024 refinance originations to increase by 48% from their record low level of 2023. Overall, for 2024, we see only a 5% gain in total originations volume.

By 2025, the rate of the economy’s growth should continue to decelerate, and perhaps it will even approach a mild recession. If so, interest rates will decline more, which will help refi volumes rebound further. But a slower economy with a weaker labor market may also slow purchase market demand. We expect a 7% growth in purchase volumes and a 37% growth in refinances for an overall growth of 14%.

Why Such Economic Strength? 

Getting back to our original thesis, the key factors leading to the rapid, robust, and sustained recovery from the COVID Recession of 2020 included (1) the quick and massive government stimulus responses, (2) the rapid development and rollout of COVID vaccines, (3) innovative business adaptation, (4) unexpectedly strong consumer spending, and (5) unexpected labor market strength.

1. Government stimulus responses occurred on both the monetary side and the fiscal side of federal policy.

• Fiscal: Congress and the administrations of Presidents Trump and Biden implemented huge stimulus packages including the $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020; the $900 billion Consolidated Appropriations Act (CAA) in December 2020; and the $1.9 trillion American Rescue Plan (ARP) in March 2021. The 2020 and 2021 fiscal stimulus measures of the U.S. added up to about 27% of GDP, one of the larger stimulus efforts of the major world economies.¹
• Monetary: The Federal Reserve slashed the Fed Funds rate to virtually zero, established emergency lending facilities for the banking system, and purchased trillions in Treasury and mortgage-backed securities to provide liquidity, ensure low-cost borrowing and lending, and preserve financial market confidence.

2. The rapid development and widespread distribution of COVID vaccines were critical to reducing the rate of infection and severity of the disease, thus contributing to the lifting of restrictions and helping restore normal economic activity, as well as consumer and business confidence.

3. Even before the vaccines, business innovation and adaptation enabled workers to continue operations safely and often remotely by accelerating digital technologies for communications, production, and sales. Few industries made better use of these adaptations than the mortgage origination business itself as it ramped up for the unprecedented refinance lending opportunity.

4. Consumer spending, or personal consumption expenditure, which comprises about two-thirds of GDP, has been unexpectedly strong throughout the post-lockdown expansion, and despite the squeeze of higher interest rates over the last couple of years, it has remained strong. It has been supported by “excess savings” accumulated by households over the 2020-2021 period. These excess savings occurred during the lockdown when households reduced spending on travel, entertainment, and other goods and services, and they were augmented by the huge stimulus measures cited above.



Cumulatively, these excess savings peaked at $2.1 trillion in August 2021, according to calculations from Federal Reserve Bank of San Francisco economists², and it has taken until early this year for them to be drawn down. Concurrently, it’s only recently that households are clearly in dis-savings mode as credit and consumption data are beginning to show.

5. Employment: Because aggregate demand — primarily fueled by consumer spending — has stayed so strong, the labor market has stayed strong as consumption and the good employment environment have fed off each other in a reinforcing virtuous cycle. Businesses have kept up production and their workforces to chase free-spending consumers longer than many experts expected. Only lately does it appear that businesses are tightening up with slower new job creation and that labor markets are finally beginning to weaken with an uptick in the unemployment rate.

These factors combined to make the post-pandemic expansion in the U.S. arguably the most robust of the major western economies and among the strongest of any in the world.

The Role of the Refi Boom

According to Freddie Mac, over the 2020-2021 period, approximately 14 million homeowners refinanced their mortgages. On average, they saved about $233 per month or about $2,800 annually.³ This represents additional disposable income that those refinancing households could devote to saving, spending, or paying down debt. As the savings data show, most has gone to consumption.

Not as many of the country’s 128 million households were able to realize this refinancing windfall as the numbers that were reached by the three main stimulus programs, and its effect has been spread out month by month since 2020 and 2021. But as the table above shows, the per-household benefit for refinancers was far greater than the generous direct payments received through those programs ($11.2K versus an average of $2.4K). Moreover, the aggregate benefit of those refinancings to the overall economy has totaled about $157 billion, which is of similar magnitude to the direct payments of the three huge COVID stimulus programs and even larger than those payments under the CAA program. 

The direct payments components of the federal stimulus programs only added up to about $838 billion, or one sixth of the $5 trillion stimulus injected into the economy, but to individual households, they were the most visible part of those programs. As such, they were critical to generating consumer confidence, as well as providing the raw fuel that drove consumption in the post-COVID recovery and expansion. The refi boom acted like a fourth major direct-payment economic stimulus, and thus, it has had a lasting and underappreciated impact on supporting the economy well after the boom ended. 

The COVID Recession Refi Boom was a boon to the mortgage origination industry in 2020 and 2021, generating huge operating profits in those years. It has also been a boon to the economy in helping to support the consumption that has driven the unexpectedly strong GDP in the past few years. However, that unexpectedly strong GDP has also been a bane to mortgage origination by helping keep mortgage interest rates high and stifling origination in 2023 and this year. 

We believe that the Fed’s recent 0.5% cut in the Fed Funds rate will lead to a sustained decline in rates across the term spectrum that will help support refinance origination, as well as reduce unaffordability to potential home purchasers and thus support purchase originations. This “recalibration,” as referenced by Fed Chair Jerome Powell, has come a little too late to have much impact on 2024 mortgage originations, but it better positions the economy to have its hoped-for soft landing in 2025 and a larger originations market.