Mortgage demand plummeted last week as homebuyers shied away from the housing market amid rising mortgage rates.
Mortgage loan application volume decreased by 10.6% last week on a seasonally adjusted basis when compared to the week before, according to a report Wednesday from the Mortgage Bankers Association.
The volume of refinances crashed by 11% during that same time, according to the group’s weekly survey.
The dropping demand comes as mortgage rates are rising again. As of Wednesday, the average rate on a 30-year fixed-rate mortgage has soared to 7.11%, according to Mortgage News Daily. That is notably up from a recent low of about 6.65% notched near the end of December.
“Mortgage applications dropped as a result with a larger decline in refinance applications,” said Mike Fratantoni, MBA’s senior vice president and chief economist. “Potential homebuyers are quite sensitive to these rate changes, as affordability is strained with both higher rates and higher home values in this supply-constrained market.”
The housing market has been in flux for nearly two years since the Federal Reserve began raising interest rates. Interest rates are now the highest they have been since before the Great Recession, causing mortgage rates to soar to highs not seen since the turn of the century.
Mortgage rates topped out at over 8% in October but have since been falling as investors began to be convinced that the Fed would soon pivot and start cutting rates.
But that trend for mortgage rates has now reversed after some inflation reports and other economic indicators that showed that the economy is remaining strong and inflation is proving stickier than previously thought, increasing the odds that the central bank will keep holding rates higher for longer.
Typically, when mortgage rates rise, demand for homebuying falls.
There is also a unique dynamic that emerged during the pandemic when interest rates were cut to near zero. At the time, mortgage rates flatlined at historic lows below 3%, causing a flurry of home purchases and refinances.
But as mortgage rates quickly rose, those who had locked in those sub-3% rates have been holding off on selling, causing a scarcity of existing homes on the market and putting pressure on the new homes market.
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Existing home sales fell in December to the lowest level in more than a decade. Existing home sales in December slowed 1% to a seasonally adjusted annual rate of 3.78 million. Sales of existing homes in December were at the lowest level since August 2010, and the pace of existing home sales is down 6.2% from the year before.
Meanwhile, new home sales rose 8% from November to December to a seasonally adjusted annual rate of 664,000, according to a report from the Census Bureau, indicating that the lack of supply of previously owned homes is directing buyers to newly built units.