Mortgage Demand Drops as Potential Buyers Ignore Falling Rates and Stay on Sidelines

The Mortgage Bankers Association (MBA) announced that applications for home loans have dropped. (Photos.com)

U.S. mortgage applications tumbled as potential buyers across the country ignored falling borrowing rates and stayed on the sideline due to still-high home prices.

Applications for mortgage loans decreased 0.8 percent from a week earlier, according to data from the Mortgage Bankers Association (MBA) for the week ended Nov. 25, 2022, with an adjustment for the Thanksgiving holiday.

The MBA’s Market Composite Index is a gauge of mortgage loan-application volume.

The Federal Reserve has been deliberately raising mortgage rates via policy rate increases in efforts to slow down the housing market and control inflation.

Interest-rate hikes increase borrowing costs, which in turn impact mortgage and refinance rates, causing a negative affect on the broader housing market.

The Fed has hiked the federal funds rate six times this year, from near zero to 3.75 percent, in its aggressive strategy to combat 40-year high inflation.

Central bank policymakers are expected to announce another round of interest-rate hikes in December.

Mortgage Rates Fall, While Home Sales Increase Slightly

Mortgage rates rose over 7 percent at the end of October, but have since fallen 0.57 percent, and have remained stable so far this week.

However, the highly anticipated monthly employment report due later this week may change that due to the effect its release normally has on mortgage rates.

The average 30-year fixed mortgage rate dropped to 6.49 percent from 6.67 percent, while mortgage rates for most other loan types declined.

“The economy here and abroad is weakening, which should lead to slower inflation and allow the Fed to slow the pace of rate hikes,” said Joel Kan, vice president and deputy chief economist at the MBA.

“Purchase activity increased slightly after adjusting for the Thanksgiving holiday, but the decline in rates was still not enough to bring back refinance activity.”

The MBA’s mortgage purchase index rose 3.8 percent, marking the fourth straight week of market gains.

Sales of existing homes have fallen this year due to high borrowing rates, which had doubled from 2022, making housing very expensive for many prospective buyers.

This followed a two-year housing boom, which was caused by the pandemic and the attendant lockdowns, as people went on a purchasing spree, and to work remotely from home.

Meanwhile, mortgage application volume fell 31 percent last week, a 41 percent decline from the same week in 2021.

Home loan applications gained merely 4 percent from the previous week, while the adjustable-rate mortgage share of activity rose to 9 percent of applications.

Refinance Rates Fall to a 22-Year Low

The MBA’s refinance index, which has been in decline for months, fell another 13 percent, for a 86 percent decline from the same week a year ago.

The refinance share of applications fell to 26 percent, despite the fact that tens of thousands of more borrowers were able to benefit from the latest drop in mortgage rates.

Refinance applications and the refinance share of applications are currently at their lowest levels since 2000.

Refinance rates, like mortgage rates, both fluctuate on a daily basis, making them very sensitive to the Fed’s next policy moves.

If inflation actually cools, refinance rates will likely follow suit, but will likely maintain its upward trajectory if it does not.