The excitement in the housing market has taken a nosedive as mortgage rates skyrocketed beyond 7%.
The Mortgage Bankers Association’s index revealed that the number of mortgage applications for home purchases sank to its lowest level in 28 years last week. The index, adjusted for seasonal fluctuations, plummeted by 5% for the week ending on August 18 compared to the previous week. On an unadjusted basis, it was 30% lower than the same period last year.
This sharp drop in applications can be primarily attributed to the recent surge in mortgage rates, particularly the 30-year fixed mortgage rate that crossed the 7% threshold, causing many prospective buyers to step back.
MBA Deputy Chief Economist Joel Kan stated, “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.”
The trajectory of rates closely follows the movement of the 10-year Treasury yield, which has risen due to concerns over persistently high inflation fueled by the robust economy.
According to the MBA’s records, the 30-year fixed mortgage rate surged to 7.31% last week, marking its highest point since December 2000. A different measurement of rates by Freddie Mac indicated an average rate of 7.09% for the same week, the highest figure since early April 2002. In fact, the rate has surpassed the 7% mark only thrice since then.
This summer has witnessed volatile rate fluctuations, which have suppressed demand as the peak homebuying season gradually winds down.
Jason Mata, a mortgage professional with American Pacific Mortgage, noted, “We are seeing [buyers] decide to maybe stay back on the sidelines a little bit because now they’ve seen changes of $200 to $300 per month in that monthly obligation, which may be a difference maker.”
This trend is reflected in the latest sales data, as closed sales of previously owned homes fell by 2.2% in July compared to the previous month. This sales pace is the weakest for July since 2010 and the third-lowest during the current housing cycle, according to data from the National Association of Realtors.
Elevated mortgage rates have also played a role in inventory constraints. Homeowners are reluctant to sell their current homes and relinquish their existing mortgage rates, especially when the rates on new properties are double.
Consequently, newly constructed homes are gaining prominence, but they are insufficient to bridge the supply gap. As a result, low supply is driving up home prices, making financing even more burdensome.
To cope with the market conditions, some buyers are opting for adjustable-rate mortgages (ARMs). Last week saw a 4% increase in ARM applications, accounting for 7.6% of all applications—marking the highest level in five months according to MBA. These mortgages offer an initial rate lower than that of fixed-rate home loans, but the rate adjusts upward after the initial fixed period ends.
“Some homebuyers are looking to lower their monthly payments by accepting some interest rate risk after the initial fixed period,” Kan explained.
As an illustration, a 5/1 ARM—fixed for five years and then adjustable each year—currently averages 6.50%, compared to the 7.62% average for a 30-year fixed loan.
Mata predicted, “I think you’re going to see more of an urgency with those that truly do need to buy because they don’t really know what to expect now from interest rates. Every time you hit a new level of interest rate, it takes a bit of time for the consumer mindset to say, ‘okay, this is the new norm.'”