Mortgage Demand Declines as Homebuyers Await Lower Rates

Mortgage interest rates dipped slightly last week but failed to entice many potential homebuyers. Despite this modest decrease, the overall demand for home loans continues to drop as buyers hold out for more significant rate cuts.

Rates Drop Marginally

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances decreased to 6.82% from 6.87%, as the Mortgage Bankers Association (MBA) reported. This slight reduction marks the lowest rate since February of this year, yet it has not significantly impacted buyer behavior.

Homebuyer Activity Declines

Despite the minor rate drop, applications for home purchase mortgages fell by 4% last week, according to the MBA’s seasonally adjusted index. This decline represents a 15% decrease in purchase demand compared to the same period the previous year. “Purchase applications decreased as ongoing affordability challenges persist with rates at their current levels and with home-price appreciation still strong in many markets,” stated Joel Kan, an MBA economist.

Buyers Anticipate Further Rate Cuts

Many prospective homebuyers are delaying their purchases, expecting rates to drop further. There is speculation that the Federal Reserve might reduce its rate in September. Although mortgage rates are influenced more by the yield on the 10-year Treasury, a Fed rate cut could lead to lower mortgage rates if inflation shows signs of easing.

“I think affordability remains stretched,” analyst Ivy Zelman commented on CNBC’s “The Exchange.” “We’d probably want to see mortgage rates come down 100 basis points, so I think if we had a five handle, even in the high fives, the market could see more momentum.”

Refinance Activity Remains Flat

Applications to refinance home loans remained relatively unchanged, increasing by only 0.3% for the week. Despite this stagnation, refinance demand is 38% higher than the same week last year, albeit from a shallow base. Kan noted, “Refinance applications were up, driven by conventional and FHA application activity, as some borrowers took the opportunity to act. Furthermore, the conventional refi index was at its highest since September 2022.”

While mortgage rates have decreased slightly, they remain high enough to keep many potential buyers on the sidelines. With ongoing affordability challenges and expectations of future rate cuts, the housing market continues to experience subdued activity. As Ivy Zelman pointed out, significant momentum is unlikely until rates drop substantially.