Mortgage Applications Drop to 30-Year Low Amid Elevated Interest Rate

Homebuyers now have to shell out close to a third of their income on mortgage payments.

Michelle Ruiz (L) and Nilson Ruiz listen as Wells Fargo home mortgage consultant Michael Carreras in Miami, Fla. Joe Raedle/Getty Images

The number of applications for mortgages dropped to an almost three-decade low as high interest rates deter buyers from purchasing a home and sellers from selling their properties.

For the week ended Sept. 29, mortgage applications fell 6 percent from a week earlier, hitting the lowest volume in roughly 27 years, according to a press release by the Mortgage Bankers Association (MBA) last Wednesday. The organization blames the market trend on high mortgage rates. Mortgage rates moved higher due to the upswing in Treasury yields, with the 30-year fixed-rate mortgage rate rising for the fourth conservative week, to 7.53 percent, “the highest rate since 2000,” said Joel Kan, MBA’s vice president and deputy chief economist.

“As a result, mortgage applications grounded to a halt, dropping to the lowest level since 1996.” The rapid increase in mortgage rates pushed “an increasing number of potential homebuyers out of the market,” causing the home purchase market to slow down to the lowest activity level since 1995, he added.

According to data from Freddie Mac, the 30-year fixed-rate mortgage rate has more than doubled since January 2020, between Jan. 20, 2021, and Oct. 4, 2023, the mortgage rate has risen from 2.77 to 7.49 percent.

“Several factors, including shifts in inflation, the job market, and uncertainty around the Federal Reserve’s next move, are contributing to the highest mortgage rates in a generation. Unsurprisingly, this is pulling back homebuyer demand,” it said.

Some experts predict mortgage rates to hit the 8 percent mark, which is a level American citizens have not seen in more than 23 years.

“In the short run, it’s possible that mortgage rates may go up to 8 percent,” Lawrence Yun, chief economist at the National Association of Realtors (NAR), said in a press call last month, according to Yahoo Finance.

The 10-year Treasury yield, which mortgage rates usually track, has been rising amid Federal Reserve’s interest rate hikes. Between March 2022 and July 2023, the Fed pushed up interest rates 11 times, from zero to more than 5 percent.

The central bank has suggested that another hike may be coming before the year ends and that the interest rates could remain higher for three more years. Such a scenario would mean tough times for homebuyers as the mortgage rates will remain elevated as well.

Constraining Home Supply

High mortgage rates are constraining the demand-supply situation in the housing market as homeowners remain reluctant to sell, making it difficult for buyers to secure a reasonably priced home within their budgets.

Homeowners are unwilling to sell properties as they “scored an incredible deal during the pandemic: a 3 percent mortgage rate for the remainder of their 30-year loan,” said Redfin Economics Research Lead Chen Zhao.

A 'For Sale' sign stands outside a home in Colorado Springs, Colo., on June 22, 2023. David Zalubowski/AP Photo

“Now they’re staying put because moving would mean taking on a rate that’s twice as high … This means buyers who are in the market now are duking it out for a very small pool of homes, preventing home values from plunging.”

In the first half of 2023, only 1 percent of American homes exchanged hands—the lowest percentage in 10 years.

According to an Oct. 4 press release by Redfin, 59 percent of recent U.S. homebuyers think buying a home is now more stressful than dating.

While 41 percent of respondents in the Redfin survey said that they face difficulty in dating, 59 percent said buying a home was difficult. In fact, home-buying was also listed as more difficult than finding a new job, getting into college, getting a divorce, or potty training a child.

“With mortgage rates at the highest level in more than two decades, many of the people moving today are relocating not because they want to, but because they have to—often due to a major life event like a divorce or a new job.”

In July, NAR suggested that “bold action” is needed to tackle supply challenges in the housing market. The organization estimated that the housing supply shortage ranges from 4–6 million units across the United States.

Affordability Challenges

According to NAR data, the cost of a median-priced existing single-family house has jumped from $300,200 in 2020 to $412,300 as of July 2023.

During this period, the mortgage rate has risen from 3.17 to 6.92 percent, and the qualifying income for buyers has more than doubled from $49,680 per year to $104,496.

Mortgage payments as a percentage of income rose from 14.7 to 28.5 percent, meaning new homebuyers could be spending as much as a third of their income to pay the mortgage.

“Homebuyers face the most difficult affordability conditions in nearly 40 years due to limited inventory and rising mortgage interest rates,” said Jessica Lautz, NAR’s deputy chief economist and vice president of research.

“The impact is exacerbated among first-time buyers who are more likely to be from underrepresented segments of the population.”

According to a NAR survey, the top three reasons why buyers have not yet bought a home are: not enough homes available for purchase in buyers’ budgets (34 percent), buyers are waiting for mortgage rates to drop as higher prices affect affordability (18 percent), and buyers are waiting for prices to drop (9 percent).