Decline in Mortgage Demand Amid Rising Rates: Implications for the Housing Market

In recent weeks, U.S. mortgage rates have surged, reaching their highest level since 2000, resulting in a notable drop in home buying demand. Mortgage demand has now fallen to its lowest point since 1996, largely attributed to a significant uptick in Treasury yields.

The impact of rising rates has been widespread, affecting both refinancing and purchase applications. As a result, the Mortgage Bankers Association (MBA) reported a 6% decline in the market composite index, a key measure of mortgage application volume, for the week ending September 29. This stands in stark contrast to the index’s reading of 218.7 from a year ago.

Buyer demand, in particular, has seen a significant decline, with the purchase index, measuring mortgage applications for home purchases, falling by 5.7% in the latest week. Purchase applications have now reached their lowest level since 1995.

Refinancing demand has also been adversely affected by the increase in rates, with the refinance index dropping by 6.6%.

For homes with a sale price of $726,200 or less, the average contract rate for a 30-year mortgage reached 7.53% in the week ending September 29, up from 7.41% the previous week, according to MBA data. Similarly, for jumbo loans, or 30-year mortgages for homes exceeding $726,200 in value, the average rate climbed to 7.51% from 7.34% the week before.

The rate for 30-year mortgages backed by the Federal Housing Administration also saw an increase, rising to 7.29% from 7.16%. The 15-year mortgage rate experienced a similar uptick, reaching 6.86% from 6.73% in the previous week.

Adjustable-rate mortgages (ARMs) observed a modest rise to 6.49% from the preceding week’s 6.47%. Notably, a higher number of buyers turned to ARMs due to their relatively lower rates, with the ARM share increasing to 8%. However, with the 10-year Treasury yield surpassing 4.8%, it is expected that rates may continue to rise further. Some lenders are already quoting rates as high as 8%.

The broader implications of these higher rates translate into a more challenging landscape for mortgage lenders and the U.S. housing market as a whole. The persisting high rates are anticipated to remain until the U.S. Federal Reserve decides to halt its rate hikes. This shift is expected to occur when economic data suggests a slowdown in the U.S. economy. As Joel Kan, Deputy Chief Economist and Vice President at the MBA, noted, “The purchase market slowed to the lowest level of activity since 1995, as the rapid rise in rates pushed an increasing number of potential homebuyers out of the market.”

It is crucial to note that the 10-year Treasury note yield has risen to over 4.8%, underlining the substantial impact of these increasing rates on the housing market.