Mortgage Demand Slumps to 25-Year Low as Rates Climb

A 'for sale' sign hangs in front of a home in Miami, Fla., on June 21, 2022. (Joe Raedle/Getty Images)

Demand for mortgages has fallen to a multi-decade low amid rising interest rates that have hit record levels, according to the Mortgage Bankers Association (MBA).

MBA’s Market Composite Index, which measures the volume of loan applications, fell 4.5 percent for the week ending Oct. 14 from a week earlier on a seasonally adjusted basis, an Oct. 19 press release from the organization states. Mortgage applications have fallen for four straight months, with the current level being the lowest since 1997.

On a yearly basis, purchase and refinance applications are down 38 percent and 86 percent respectively. The decline in mortgage demand has happened as 30-year fixed mortgage interest rates hit 6.94 percent, the highest since 2002, and three percentage points higher than a year back.

“The speed and level to which rates have climbed this year have greatly reduced refinance activity and exacerbated existing affordability challenges in the purchase market,” Joel Kan, MBA’s vice president and deputy chief economist, said in the release.

“Residential housing activity ranging from housing starts to home sales have been on downward trends coinciding with the rise in rates.”

The share of adjustable rate mortgages (ARMs) in total mortgage applications rose to 12.8 percent, the highest since March 2008. ARM loans remain a “viable option” for borrowers looking to cut down their monthly payments, Kan said.

According to the NAHB/Wells Fargo Housing Opportunity Index, only 42.8 percent of new and existing homes sold in the second quarter were affordable to American families earning a median U.S. income of $90,000. In the first quarter, 56.9 percent of such homes were affordable for this demographic.

Home Prices Forecast, Sales Dropping

In an Oct. 5 commentary, Wells Fargo economists pointed out that a housing correction is “already under way.” They expect home prices to register a year-over-year decline in 2023, with the national median existing single-family home price projected to decrease by 5.5 percent next year.

“Markets where home prices shot the highest are now vulnerable to a disproportionate swing to the downside, notably in previously white-hot markets in the Mountain West where sales activity has slowed notably,” the commentary said.

A recent report by real estate firm Redfin reveals that the number of homes sold in September fell by 25 percent while new listings declined by 22 percent. These are the largest declines in both categories except for the decline seen during the 2020 pandemic, the report said.

Roughly 60,000 home purchase agreements—making up about 17 percent of homes that went under contract—were scrapped last month.

Chicago took the top spot as the slowest housing market in the United States, followed by Lake County also in Illinois; Charleston in South Carolina; Honolulu, Hawaii; and Pittsburgh, Pennsylvania.