As Mortgage Interest Rates Rise, New Starts, Refis & Builders’ Confidence Fall

Key Highlights

• Higher mortgage rates cutting into new building starts, refi demand and builders’ confidence
• Interest rates of 3.2% last week hit highest level since June 2020

Higher Interest Rates Lower Refinance Demand

Like a clock, higher interest rates impact refinance demand.  Mortgage interest rates hit 3.28% and immediately demand for refinancing  dropped -4% last week.  Likewise, refi demand fell –39% compared with the same week one year ago, according to the Mortgage Bankers Association (MBA).

Refinance demand is most vulnerable to interest rate fluctuations. Just recently, refinance volume was up more than +100% from last year at this time.  And on a week-to-week basis, the refinance share of mortgage activity dropped from 64.5% to 62.9%.

Interest Rates Hit Highest Level Since June 2020

Going to 3.28% from 3.26% with points decreasing from 0.43 to 0.41, mortgage interest rates haven’t been this high since June 2020.

Joel Kan, an economist with the MBA, said, “After reaching a recent high in the last week of January, the refinance index has fallen -26% to its lowest level since September 2020.  Rates have jumped 36 points since the end of January, and last week refinance activity fell across all loan types.”

Purchase Applications Increased +2% for Same Week and +5% Than Same Week Last Year

As we’ve mentioned, purchase applications are less sensitive to interest rate fluctuations than refinance applications.

Kan said, “The purchase market helped offset the slump in refinances…as the recovering job market and demographic factors drive demand, despite ongoing supply and affordability constraints.”

New Home Starts Down -10.3% in February

Whatever brunt there is to be taken when interest rates go up, the new homes sector of the housing industry takes that brunt.  Rather than an expected drop in new home starts of -2.5%, new home starts dropped -10.3% in February.

Homebuilder Confidence Also Down

The National Association of Home Builders/Wells Fargo(NAHB) Housing Market Index just reported a drop of 2 points to 82 in March.  This monthly measure of homebuilder confidence in the single-family housing sector may foretell “a rough patch” for the new home sector even as the economy begins to take off.

Material Costs Also Increasing

Not only are interest rates rising, material costs, especially lumber prices, are increasing.  Those increased material costs only make new home sale prices go up.  The proof?  The median price of a newly built home was up +5% y/y in January.

According to Robert Dietz, chief economist with the NAHB, “…the elevated price of lumber is adding approximately $24,000 to the price of a new home…and mortgage interest rates, while historically low, have increased about 30 basis points over the last month.”

Thanks to the Mortgage Bankers Association, the National Association of Home Builders and CNBC.

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