Decline in Mortgage Demand Following 21-Year High Interest Rate for FHA Loans

Mortgage interest rates experienced a notable surge last week, resulting in the government’s low down payment option hitting a 21-year high. The Mortgage Bankers Association’s seasonally adjusted index reported a significant decline of 3.1% in total application volume compared to the previous week, primarily due to this increase.

The average contract interest rate for 30-year fixed-rate mortgages, conforming to loan balances of $726,200 or below, rose from 6.93% to 7.09%. Points also witnessed a slight increase from 0.68 to 0.70 (including the origination fee) for loans with a 20% down payment. Additionally, the average rate for jumbo loans reached 7.04%.

Federal Housing Administration loans, which are favored by first-time or lower-income borrowers due to their low down payments, soared to 7.02%, marking the highest rate since 2002.

According to MBA’s Vice President and Deputy Chief Economist, Joel Kan, the surge in Treasury yields and subsequent mortgage rate increase can be attributed to a combination of the Treasury’s funding announcement and the downgrading of the U.S. government debt rating.

As a result, applications for home purchases dropped by 3% in the week and were 27% lower compared to the same week one year ago. These high mortgage rates are not only impacting the affordability of homes but are also preventing current homeowners from making a move. Many homeowners, who currently have mortgages with interest rates ranging from 3% to 4%, are hesitant to pay double that amount for another home.

Refinancing applications also witnessed a decline of 4% during the week and were similarly 37% lower than the same week the previous year.

As the new week begins, mortgage rates have remained above 7%, according to a separate survey conducted by Mortgage News Daily. Thursday’s release of the monthly inflation data could potentially trigger even more significant movements in these rates.