Despite interest rates slipping, mortgage applications tumbled.

Interest Rate Hikes Have Already Damaged Affordability

Even though the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances of $647,200 or less slipped from 5.53% to 5.49% last week, mortgage applications dropped.

According to the Mortgage Bankers Association, both purchase and refinance loan applications dropped.  Total mortgage application volume fell -11%.

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Mortgage purchase applications plunged -12% w/w to mark the first weekly drop in homebuyer demand since the third week in April.  No wonder…mortgage rates have climbed over 2 full percentage points since January and home prices have jumped more than +20% y/y.

Inflation Not Helping

Joel Kan, an MBA economist, said, “General uncertainty about the near-term economic outlook, as well as recent stock market volatility, may be causing some households to delay their home search.”

Demand for Adjustable-Rate Mortgages Climbed +14%

It’s also no wonder that demand is surging for adjustable-rate mortgages (ARMs).  ARMs offer homebuyers lower interest rates, a full 1 percentage point lower at the moment, and can be fixed-rate for up to 10 years.

Last week, the ARM share of total mortgage applications remained at a high of 10.5%.  (At the beginning of 2022, the ARM share of total mortgage applications stood at 3%.)

Demand for Refinancing Continued to Landslide

The refinance boom that was ignited during the two years of record-low interest rates by the COVID pandemic is over.  Over 90% of mortgaged properties were refinanced during those two years and the pool of borrowers who could now benefit from a refinance is very, very small.

Higher interest rates and refinancing simply do not go hand-in-hand.  Applications to refinance a home loan plunged another -10% w/w and refinance demand was a full -76% lower y/y.

Additional Bad News for Homebuyers

End of week, mortgage rates did an about face and moved higher due to mediocre quarterly sales reports from Target and Walmart.  Fed Chairman Jerome Powell made it clear that the Fed would not hesitate to continue boosting interest rates until inflation is normalized.

The National Association of Home Builders also announced that home builder sentiment dropped to its lowest level in nearly two years. (See this week’s companion article.)  The NAHB indicated a significant drop in both current sales conditions and buyer traffic.

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