Rosalind Evans
The world of mortgages witnessed a surprising turn last week. The adjustable-rate mortgage (ARM), a mortgage whose interest rate is periodically adjusted based on specific indices, saw a spike in demand. This move was in direct contrast to the fixed mortgage rates, which reached an unseen level since 2000.
The Mortgage Bankers Association’s seasonally adjusted index indicated that while the 30-year fixed mortgage rate rose significantly, adjustable-rate mortgages dropped. This caused a subsequent rise in mortgage application volumes, albeit by a mere 0.6% compared to the prior week.
For 30-year fixed-rate mortgages with conforming loan balances of $726,200 or less, the interest rate shot up to 7.67% from 7.53% for loans with a 20% down payment. Meanwhile, 5/1 ARMs saw their average contract interest rate reduce to 6.33% from 6.49%. The intrinsic attraction of ARMs is their typically lower rates stemming from their shorter fixed terms. Although the difference between ARM rates and the 30-year fixed rate was marginal recently, the last week witnessed it broadening.
Joel Kan, MBA’s vice president and deputy chief economist, stated, “The level of ARM applications increased by 15% over the week, bringing the ARM share up to 9.2% of all applications, the highest share since November 2022. The yield curve has become less inverted recently, and ARM pricing has certainly improved.”
Applications concerning refinancing a home loan climbed by 0.3% week-over-week but remained 9% lower than the previous year’s timeframe. Mortgage applications for purchasing homes increased by 1% over the week, but they are still a staggering 19% lower compared to the same week a year ago.
Kan stated, “Application activity remains depressed and close to multi-decade lows, with purchase applications still almost 20% behind last year’s pace.”
An insightful observation is the reduction in average loan size, which is currently at its most diminutive since 2017. This drop suggests that most sales lean towards the market’s lower end. Due to significant hits to affordability, the market’s middle range appears virtually static.
However, the atmosphere in the housing market is more contemplative than active. As a real estate agent, Lisa Resch stated during an open house in Washington, D.C., “In this first two weeks of October, as anticipated, inventories have taken a jump, but then because interest rates have taken a jump too, we’re seeing fewer buyers. Lots of traffic, but not a lot of actual shoppers.”
The mortgage landscape is currently rife with anomalies. While adjustable-rate mortgages seem to be the month’s flavour, the overarching environment appears contemplative at best. With the tangible challenges of rising interest rates and affordability, how this saga unfolds in the broader real estate market remains to be seen.
