Low mortgage rates
Mortgage rates began the year at slightly above 4 percent, but have trended down throughout the year2 Mortgage rates reported weekly in Freddie Mac’s Primary Mortgage Market Survey.. Mortgage rates have followed long-term U.S. Treasury yields down3 The historical correlation between Treasury yield and mortgage rates is very high.
Mortgage rates and 10-year Treasury yields
Additional context for mortgage rates. The chart below shows mortgage rates from 1971 through 2016. 
Low mortgage rates help to support homebuyer affordability. For example, for a buyer looking to finance a home purchase with a $200,000 loan, a 1/4 percentage point increase in interest rate increases annual Principal and Interest mortgage payments by $341. If a household can only just qualify for a $200,000 mortgage at a 30-year rate of 3.66 percent, then with rates at 3.91 (+0.25 percentage points) the maximum loan amount this borrower could qualify for would be $194,000. From a constrained borrower’s point of view, a quarter point in rate is like a 3 percent increase in house prices.
Mortgage refinance: mostly dead, but not all dead
Outstanding Agency Mortgage Backed Securities (30-year FRM) 
As of December 2015, there remained a significant volume of outstanding single-family mortgage debt that could possibly benefit by refinancing into a lower mortgage rate. Just in the conventional conforming (excluding FHA/VA and Jumbo loans) space there was $655 billion oustanding with a contract rate above market interest rates. And an additional $592 billion might find a refinance attractive with mortgage rates below 4 percentage points for the 30-year fixed rate mortgage.
Low mortgage rates help to support refinance activity in 2016. Many analysts had expected mortgage rates to rise to start 2016 and spend most of the year well above 4 percent for the 30-year fixed rate mortgage. Instead, mortgage rates tumbled to start the year and breathed additional live into mortgage refinancing activity.
Freddie Mac has been forecasting that refinance mortgage activity would decline as interest rates rose. But low mortgage rates through the first four months of 2016 have allowed additional refinance activity. The charts below show the history and forecast for single-family mortgage originations from Freddie Mac’s April 2016 Outlook.
The charts show a shift from refinance to purchase mortgage activity as higher rates gradually reduce refinance activity while home sales and house price appreciation help drive purchase activity higher.
The purchase market strengthens
Mortgage origination activity is projected to remain relatively strong due to the strong projected growth in home purchase mortgage activity. This relies on two things4 Another important factor is what happens with the cash share of transactions. See for example, recent research from CoreLogic. Cash shares have trended down in recent years and that underlies most forecasts of mortgage activity. Were cash shares of home sales to rise, then purchase mortgage activity would either increase at a slower pace or even decline given the same number of home sales and the same level of house prices. : 1) continued improvement in home sales, and 2) continued positive house price growth.
Recent trends in home sales
Home sales have gotten off to a solid start for the year. Housing markets are highly seasonal, so the first three months of the year are typically some of the lowest months. Winter weather slows construction activity and many prospective buyers do not actively shop for homes in January and Febraury when weather is often snowy in much of the country. As we enter the spring, home sales typically accelerate.
Animated gif of monthly non-seasonally adjusted home sales 2007-2016. 
The pace of sales through March of 2016 is the second fastest first quarter since 2006, with 2016 edging out 2015, but falling beind 2007. In 2007, home sales in the summer months failed to match their typical seasonal pattern as the housing market cooled.
Nevertheless, the first three months of 2016 showed robust activity. Monthly housing data is often noisy, but total home sales recorded in the first three months were the highest since 2007. The graphic below compares non-seasonally adjusted home sales for the first three months of each of the past 10 years.
Existing home sales gather strength
Despite tight inventories, existing home sales have been trending higher in recent months. The graphic below contains the history of existing home sales, as reported by the National Association of Realtors since 2006. The annotations indicate important events5 Early in the recovery there were two first-time homebuyer tax credit expirations that caused home sales to spike and drop. In 2013, the “Taper Talk” event drove mortgage rates up over a full percentage point during the spring of 2013, significantly slowing housing market activity. And in November of 2015 the implementation of TRID caused some delays in closing home sales. that drove short term trends in the existing sales market.
New home sales treading water
On the new home sales front, momentum has been slow to build. The recent history of new home sales as reported by the U.S. Census Bureau in their joint release with the Department of Housing and Urban Development (HUD) is plotted in the graph below.
It’s important the recognize that new home sales estimates are based on a relatively small sample and subject to considerable sampling uncertainty. The graph above includes the confidence interval reported by Census/HUD. Over the past year there’s been no statistically significant variation in the number of new home sales. New home sales are up significantly from the lows of a few years ago and housing construciton data suggest they’ll head higher over the next year.
Demand still strong
Mortgage applications have been trending significantly higher over the past few months. The chart below compares the year-over-year percentage change in total home sales and mortgage purchase applications. Purchase applications have been increaing at nearly a 30 percent year-over-year pace, a sign of strong housing demand. But will there been sufficient supply?
Inventory tightness
A key constraint on home sales activity has been low levels of for-sale inventory.
As the chart above shows, existing homes for sale have been flat over the past three years (with typical seasonal ups and downs) while new homes for sale have been trending higher, but from a low base. With low mortgage rates and a labor market posting solid jobs gains month after month, housing demand is likely to remain strong throughout the spring and summer.
