Mortgage Demand Declines as Interest Rates Reach a Two-Month High

The combination of higher mortgage rates and a severe shortage of available homes negatively impacts the demand for mortgages.

According to the seasonally adjusted index from the Mortgage Bankers Association, mortgage applications for home purchases dropped by 4.8% last week compared to the previous week. Furthermore, the volume was 26% lower than the same week in the previous year.

In a statement, Joel Kan, an economist at the MBA, noted that “purchase applications decreased to the slowest pace in a month as buyers remain cautious due to rate volatility, and also because the inventory of homes for sale in many parts of the country remains scarce.”

The average contract interest rate for 30-year fixed-rate mortgages, with conforming loan balances of $726,200 or less, increased to 6.57% from 6.48%. The associated points remained at 0.61 (including the origination fee) for loans with a 20% down payment. This marks the highest rate in two months, compared to 5.49% during the same week in the previous year.

Although Treasury yields remained relatively stable, mortgage rates rose last week, leading to a spread of 310 basis points between the 30-year fixed rate and the 10-year Treasury rate.

Matthew Graham, the Chief Operating Officer of Mortgage News Daily, explained that “mortgage rates have been struggling against Treasuries since the Federal Reserve stopped reinvesting its bond portfolio proceeds in late 2022.” He added that the sector had been burdened by the increased supply of mortgage debt resulting from the FDIC’s various liquidation efforts.

The demand for refinancing home loans saw a more significant decline of 8% for the week, as refinances are highly sensitive to weekly rate fluctuations. Year over year, refinance demand dropped by 43%. With rates now more than double what they were during the early years of the COVID-19 pandemic, very few borrowers can benefit from refinancing.

The rising mortgage rates and limited housing inventory dampens mortgage demand, with home purchase applications and refinancing activity experiencing declines. Buyers are hesitant due to rate volatility and a scarcity of homes for sale in many areas. The widening spread between mortgage rates and Treasury yields adds further pressure to the market. As rates remain elevated compared to pre-pandemic levels, the number of borrowers able to benefit from refinancing has significantly decreased. These factors collectively contribute to a challenging landscape for the mortgage industry.