Mortgage Demand Contracts as Interest Rates Surge to Near 23-Year Highs

In a notable development, mortgage interest rates have surged to levels not witnessed since the year 2000, thereby contributing to a significant decline in mortgage demand, which now stands at a 27-year low.

According to the Mortgage Bankers Association’s (MBA) seasonally adjusted index, the total volume of mortgage applications declined by 1.3% in the past week when compared to the previous week. Furthermore, the volume demonstrated a stark year-over-year decrease of 25.5%.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances, generally $726,200 or less, rose to 7.41%. This rate increase, from the previous 7.31%, came alongside a reduction in points from 0.72 to 0.71 (inclusive of the origination fee) for loans involving a 20% down payment. This rate is in stark contrast to the 6.52% seen just one year ago.

The 30-year fixed jumbo mortgage rate, a benchmark in the MBA’s jumbo rate series dating back to 2011, reached a historic high of 7.34%.

Joel Kan, an economist at MBA, noted, “Based on the FOMC’s most recent projections, rates are expected to be higher for longer, which drove the increase in Treasury yields.” The reference to the Federal Open Market Committee (FOMC) emphasizes the anticipation of prolonged higher interest rates. The overall result of these heightened rates is a reduction in mortgage applications, impacting both prospective homebuyers and existing homeowners.

Refinancing applications fell by 1% during the week, registering a stark 21% year-over-year decline. The record-low interest rates observed in the initial years of the pandemic, which prompted a refinancing surge, have left a limited pool of borrowers with mortgage rates high enough to justify refinancing.

Applications for home purchase loans saw a 2% decline in the past week and exhibited a substantial 27% year-over-year decrease. This trend is reflective of the current real estate landscape, characterized by an unprecedented scarcity of homes available for sale. It’s important to note that this low supply, coupled with rising interest rates and prices, is creating a unique dynamic. While higher interest rates typically exert downward pressure on home prices, the existing supply and demand imbalance is so pronounced that it is actually driving prices higher, despite an increasing number of potential buyers facing affordability challenges.

This week also witnessed a further uptick in interest rates, as indicated by a separate survey from Mortgage News Daily. Even sales of newly constructed homes, which had been rising due to the limited supply in the resale market, experienced a setback in August. Sales declined by nearly 9% in August compared to the pace observed in July, marking the lowest level recorded since March.