Mortgage demand has fallen to the lowest level in 28 years as homebuyers shy away from rising mortgage rates that have hit highs not seen since the turn of the century.
Mortgage loan application volume decreased by 4.2% last week on a seasonally adjusted basis when compared to the week before, according to a Wednesday report from the Mortgage Bankers Association.
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The volume of refinances dropped by 3% during that same time and is 35% lower than this time last year, according to the group’s weekly survey.
As of Wednesday, the average rate on a 30-year fixed-rate mortgage has soared to 7.49%, according to Mortgage News Daily. That marks a nearly 0.5 percentage point increase in just the past month alone. The last time rates were this high was November 2000.
“Treasury yields continued to spike last week as markets grappled with illiquidity and concerns that the resilient economy will keep inflation stubbornly high,” said Joel Kan, MBA’s vice president and deputy chief economist. “Applications for home purchase mortgages dropped to their lowest level since April 1995, as homebuyers withdrew from the market due to the elevated rate environment and the erosion of purchasing power.”
“Low housing supply is also keeping home prices high in many markets, adding to the affordability hurdles buyers are facing,” Kan said.
Housing affordability has become a major barrier to potential homebuyers because of the somewhat strange dynamic going on in the housing market.
During the pandemic, the Federal Reserve slashed its interest rate target to near zero and held it there for two years. As a result, mortgage rates plunged to historic lows, falling to below 3% for some time. In turn, homebuyers rushed out to lock in those ultra-low rates sending demand soaring and causing the housing market to become red-hot. Home prices also soared, given the high demand.
That all changed when the Fed began hiking in March of last year. Soon mortgage rates began ticking up, and buyers began bowing out of the market, which caused housing prices to fall as demand declined. But now, with mortgage rates above 7%, a new dynamic has emerged and has actually heated the market back up a bit.
Because so many people who locked in sub-3% mortgages now would face high rates, they are refusing to put their existing homes on the market because they want to hold onto their super-low mortgages. That means the housing supply has dwindled and put pressure on new home sales, which have increased as a result.
New home sales rose 4.4% from June to July to a seasonally adjusted annual rate of 714,000, according to a report this week from the Census Bureau. Sales in July were 31.5% higher than in July 2022.
Despite the high mortgage rates, which would conventionally cause new home prices to fall. The median sales price for a new home actually increased to $436,700 in July.
Meanwhile, existing home sales fell by 2.2% from June to July to a seasonally adjusted rate of 4.07 million, according to a report this week by the National Association of Realtors.
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Given the combination of high mortgage rates and fewer existing homes hitting the market, homebuyers can get a far smaller house for the same amount of money as they could just a year or two ago.
“Two factors are driving current sales activity — inventory availability and mortgage rates,” said NAR chief economist Lawrence Yun. “Unfortunately, both have been unfavorable to buyers.”