Homebuyer Mortgage Demand Plateaus Amid Rising Interest Rates

Refinancing Surges While Purchase Activity Struggles in Face of Rate Increases

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As interest rates continue their upward trajectory, the resilience of mortgage demand, particularly among homebuyers, is being tested. Despite a modest increase in total mortgage application volume, driven solely by refinancing activity, the appetite for home purchases is waning.

According to the Mortgage Bankers Association’s seasonally adjusted index, total mortgage application volume inched up by 3.7% last week compared to the previous week, primarily fueled by refinancing endeavors. However, this growth masks the underlying challenges faced by prospective homebuyers.

The average contract interest rate for 30-year fixed-rate mortgages experienced a marginal uptick to 6.80% from 6.78%, with points decreasing slightly to 0.59 from 0.65, encompassing the origination fee for loans with a 20% down payment. Notably, this average rate fails to capture the substantial surge witnessed last Friday, following a significantly stronger-than-anticipated monthly employment report from the U.S. Labor Department for January. Mortgage rates soared by 29 basis points post-data release, followed by an additional 12 basis points on Monday following an unexpectedly positive manufacturing report. These successive increases marked the third-largest spike in mortgage rates since March 2020.

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Despite a temporary reprieve in rates earlier in the week, mortgage applications for home purchases declined by 1% compared to the previous week and registered a notable 19% drop from the corresponding week last year. Joel Kan, an economist at the MBA, attributed this decline to persistently low housing supply, despite a comparatively robust start to 2024 in purchase activity.

In contrast, applications for refinancing surged by 12% for the week, indicating a slight uptick compared to the same period last year. However, the significance of this increase is tempered by the fact that the baseline for refinancing activity remains relatively low.

Refinancing activity accounted for 35.4% of total mortgage applications, up from 34.2% in the previous week, underscoring the dominance of this segment in the current market landscape.

Matthew Graham, Chief Operating Officer at Mortgage News Daily, attributed the recent fluctuation in mortgage rates to unexpected economic strength, noting that Federal Reserve officials have tempered expectations for imminent rate cuts in 2024, contrary to market sentiments at the outset of the week.