The number of applications for home mortgages dropped last week to the lowest level since mid-July, dampened by a decline in refinancing activity and, to a lesser extent, reduced purchase applications, according to the Mortgage Bankers Association (MBA).
Total mortgage application volume fell 1.9 percent last week from the week prior, according to MBA’s composite index that tracks mortgage originations. The drop reflects a 2.8 percent week-over-week decline in applications to refinance existing loans and a 0.2 percent decline in mortgage applications to buy a home.
“Refinance volume has been moderating, while purchase volume continues to be lower than expected given the lack of homes on the market,” Mike Fratantoni, MBA’s senior vice president and chief economist, said in the report.
The shift toward remote working during the pandemic changed preferences for location and type of housing, exacerbating the existing housing inventory shortage and pushing up prices. National home prices rose 7 to 19 percent year-over-year each month from September 2020 to June 2021, according to the Case-Shiller Index. In a May research note (pdf), analysts at Freddie Mac estimated that the current shortage of homes is around 3.8 million, a sharp increase from an estimated 2.5 million in 2018.
The average interest rate for the benchmark 30-year mortgage remained unchanged at 3.03 percent last week, according to the MBA, with Fratantoni saying that continued economic recovery could push rates higher.
“Economic data has sent mixed signals, with slower job growth but a further drop in the unemployment rate in August. We expect that further improvements will lead to a tapering of Fed MBS purchases by the end of the year, which should put some upward pressure on mortgage rates,” Fratantoni added.
While the Federal Reserve’s decisions don’t drive mortgage rates as directly as they do savings accounts and CD rates, there’s an indirect impact via the central bank’s effect on the Treasury market, chiefly on the 10-year Treasury yield, which mortgage rates track closely.
The 10-year Treasury note yield stood at 1.38 percent on Sept. 7, ranging this year from a low of 0.93 percent on Jan. 4 to a high of 1.69 percent on May 12, according to federal data.
The Fed has been buying around $120 billion in monthly Treasury and mortgage securities since the onset of the pandemic, a measure that, in addition to near-zero interest rates, was meant to help the economy recover from the COVID-19 recession. While economic output has fully bounced back to pre-pandemic levels, the labor market recovery is trailing behind.
Employment has risen by 17 million since April 2020 but it remains down by 5.3 million, or 3.5 percent, from its pre-pandemic level in February 2020. The national unemployment rate has fallen from 5.4 percent in July to 5.2 percent in August, while the total number of unemployed people edged down to 8.4 million, according to the most recent non-farm payrolls report.
The labor market is the key touchstone for the Fed, with Federal Reserve Chairman Jerome Powell hinting at the Jackson Hole Symposium several weeks ago that reaching full employment was a prerequisite for the central bank to start tapering asset purchases.
Reuters contributed to this report.