In a stark reflection of the escalating borrowing costs, demand for mortgage applications in the United States plummeted by 6% during the week ending September 29, reaching its lowest point since 1995, as per the latest survey conducted by the Mortgage Bankers Association (MBA).
This pronounced decline in mortgage applications, although anticipated, coincided with a significant surge in the average rate for the conventional 30-year loan, which surged from 7.41% in the previous week to 7.53%. This rate represents the highest level observed since December 2000, prompting potential homebuyers to either step back from the market or explore alternative options to mitigate the financial impact. Adjustable-rate mortgages (ARMs) have notably gained traction as they offer lower interest rates compared to conventional loans, given that 30-year mortgage rates remain firmly above 7%.
Joel Kan, MBA’s Chief Economist, commented on the situation, saying, “The purchase market slowed to the lowest level of activity since 1995, as the rapid rise in rates pushed an increasing number of potential homebuyers out of the market.” He further noted that “ARM loan applications picked up over the week, and the ARM share increased to 8%, as some borrowers searched for ways to lower their payments.”
In total, the demand for home purchases saw a 22% decrease compared to the same week in the previous year, marking its lowest point since 1996. Kan remarked, “Mortgage applications ground to a halt.”
Despite the overall decline, there were some indications of life in the market. The percentage of applications for Federal Housing Administration (FHA) loans increased from 14.1% to 14.5% in the past week. FHA-backed mortgages last week featured an average interest rate of 7.29%, slightly lower than that of conforming loans. FHA loans are often an attractive option for entry-level buyers, thanks to competitive rates and lower down payment requirements.
However, the share of all loan applications backed by the US Department of Veterans Affairs (VA) declined from 10.9% to 10.1% during the same period, while the share of USDA loans remained steady at 0.5%.
The MBA also noted a surge in ARMs, indicating that buyers are eager to explore any avenue to alleviate the burden of higher interest rates. The average contract rate for 5/1 ARMs stood at 6.49% during the week ending September 29, a notable contrast to the 7.53% rate for the typical 30-year fixed conventional loan.
Nevertheless, overall market activity remains subdued, as prospective buyers continue to grapple with challenges such as limited inventory and persistently high home prices. Beatrice de Jong, a real estate broker at The Beverly Hills Estates, observed, “Rates were the highest of the year… there are fewer buyers actively searching for homes, leading to reduced competition.”
In addition to the drop in mortgage applications, new home sales experienced a significant decline in August. Pending home sales, considered an indicator of future closed sales, also slumped in the past month. Furthermore, closed sales of previously-owned homes hit a seven-month low.
Despite the gloomy outlook, there is a glimmer of hope for buyers as inventory levels show a slight increase. As of the week ending October 3, there are now 535,000 single-family homes on the market, marking a 1.3% rise from the previous week. This uptick represents a modest deceleration from recent weeks when inventory was increasing by nearly 2%, according to Altos Research. Nevertheless, there are still 5% fewer homes available compared to the same period last year.
Mike Simonsen, CEO of Altos Research, commented on the situation, saying, “Fewer offers are being made, so inventory builds.”
Despite these small positive indicators, potential homebuyers may still face challenges ahead. The Federal Reserve hinted last month that it may maintain higher interest rates for an extended period due to persistent inflation, which could continue to deter many potential buyers from entering the market. Simonsen noted, “For many potential people in the market, it’s really easy for them to take a wait and see attitude.”
In conclusion, the steep increase in interest rates has undeniably taken its toll on the real estate market, driving the demand for mortgage applications to its lowest point since 1995, while potential buyers grapple with the challenges of high borrowing costs and limited inventory.
Source: Yahoo Finance
