Mortgage demand falls as interest rates surge to multiyear highs

A home stands for sale in a Brooklyn neighborhood on New York City.

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A sharp jump in mortgage rates last week soured demand from both current homeowners and potential homebuyers, causing mortgage applications to drop. With rates now back on the expected upward trajectory, following a brief drop at the start of the Russian invasion of Ukraine, mortgage volume is likely to fall further in the coming weeks.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) increased to 4.27% from 4.09%, with points rising to 0.54 from 0.44 (including the origination fee) for loans with a 20% down payment, according to the Mortgage Bankers Association.

“Mortgage rates continue to be volatile due to the significant uncertainty regarding Federal Reserve policy and the situation in Ukraine. Investors are weighing the impacts of rapidly increasing inflation in the U.S. and many other parts of the world against the potential for a slowdown in economic growth due to a renewed bout of supply-chain constraints,” said Joel Kan, an MBA economist.

Applications to refinance a home loan, which are most sensitive to weekly rate moves, fell 3% for the week, seasonally adjusted, and were 49% lower than the same week one year ago, when rates were a full percentage point lower. The refinance share of mortgage activity decreased to 48.4% of total applications from 49.5% the previous week. Fewer and fewer borrowers can now benefit from a refinance, and while borrowers now have considerably more equity in their homes than before the Covid pandemic, most will take it out in a second loan, rather than refinance to a higher rate.

Mortgage applications to purchase a home rose just 1% for the week and were 8% lower than the same week one year ago. Homebuyers today are facing an increasingly expensive market, as prices are still gaining at a record pace from a year ago. Supply is starting to increase slightly, but there are still not nearly enough homes on the market to meet demand and cool competition.

Home prices are so high that the average loan size in applications last week to buy a home was $453,200 – the second-highest amount in the MBA’s survey.

Mortgage rates moved significantly higher at the start of this week, as investors anticipate an interest rate hike Wednesday by the Federal Reserve. While mortgage rates don’t follow the fed funds rate, they do loosely follow the yield on the 10-year Treasury and are also heavily influenced by the Fed’s plan to taper its purchases of mortgage-backed bonds and reduce its holdings.

“Any time yields are pushing multi-year highs, it’s at least worth having a discussion about potential shifts in the trend based solely on momentum,” wrote Matthew Graham, chief operating officer of Mortgage News Daily. “It’s not oversimplifying things to say that rallies can happen simply due to an overabundance of selling pressure.”  

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