New Home SalesCENSUS
1,086K
U.S. Housing Market · 2003
U.S. Housing Market in 2003
refi boom5.83% rate lowsubprime expansion begins
Existing SalesNAR
6.18M
Median PriceNAR
$170,000
30Y MortgagePMMS
5.83%
2003 was the year of the great refinancing wave. Mortgage rates fell to 5.83% — the lowest reading since the early 1960s — and existing sales reached 6.18M.
Two forces converged. The Federal Reserve held the fed funds rate at 1% from June 2003 through June 2004, the lowest since 1958. Simultaneously, securitization of subprime and alt-A mortgages was scaling rapidly — by 2004 nearly half of U.S. mortgage originations were sold into private-label RMBS, expanding credit availability dramatically. The housing market was about to enter the most consequential boom in modern history.
Macroeconomic Context
Two thousand three was the year the Federal Reserve put its foot to the floor on monetary stimulus. GDP growth had recovered to roughly 2.9 percent — decent but below potential — and the Fed remained worried about deflation risk and the slow pace of job creation (the labor market would not recover its pre-recession employment levels until 2005). In June 2003, the FOMC cut the federal funds rate to 1 percent, a level not seen since the Eisenhower era, and held it there for a full year. Consumer price inflation was modest at about 2.3 percent.
The Iraq War began in March. Coalition forces toppled Saddam Hussein's government within weeks, but an insurgency quickly developed, and the conflict's long-term costs — in lives, dollars, and geopolitical credibility — were not yet understood. The war's short-term economic impact was modest: oil prices rose but did not spike to crisis levels.
At 1 percent, the federal funds rate effectively provided free money to the financial system. Mortgage rates hit their lowest levels since the 1950s: the 30-year fixed averaged roughly 5.8 percent for the year. The refinancing market reached extraordinary volumes — trillions of dollars in outstanding mortgages were repriced at lower rates — and purchase originations surged. Subprime and alternative-documentation lending expanded rapidly as lenders competed for business in an environment where traditional credit-quality borrowers were already financed.
Existing-home sales set new records. Median prices appreciated at the fastest pace in years. What was widely celebrated as a democratization of homeownership was, in retrospect, a credit bubble in its early growth phase — one that would take three more years to peak and five more to fully unwind.