Mortgage Rates Surge, Dampening Homebuyer Demand

Rising Rates Add to Affordability Challenges and Deter Purchases

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Following a brief respite in December and January, mortgage rates are once again on the rise, resulting in a decline in mortgage demand, according to the latest data from the Mortgage Bankers Association.

Total mortgage application volume decreased by 2.3% last week compared to the previous week, with the average contract interest rate for 30-year fixed-rate mortgages climbing to 6.87%, the highest level since early December 2023. Points also rose to 0.65 from 0.59 for loans with a 20% down payment.

Refinance applications, which are sensitive to weekly rate fluctuations, dropped by 2% for the week but remained 12% higher than the same week last year. Despite rates being half a percentage point higher than a year ago, the recent dip from the fall’s 20-year high has spurred some borrowers to seek savings through refinancing, although most current borrowers still have significantly lower rates than those available today.

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Meanwhile, mortgage applications for home purchases fell by 3% for the week and were 12% lower compared to the same week a year ago. Elevated rates are exacerbating affordability challenges, compounded by persistently low inventory levels in the existing housing market, according to Joel Kan, an economist at the MBA.

A recent report by Redfin revealed an 8% decline in pending home sales over the past four weeks compared to the same period last year, reflecting a slowdown in signed contracts for existing homes. Chen Zhao, Redfin’s economic research lead, attributed the subdued demand partly to the harsh winter weather and the resurgence of mortgage rates, deterring some prospective buyers from venturing out.

Tuesday’s government report on inflation, indicating higher-than-expected inflation rates, further fueled the surge in mortgage rates. The average rate on the 30-year fixed reached 7.08%, prompting immediate reactions in the bond market, which underlies mortgage rates. Bonds continued to deteriorate throughout the day, prompting many mortgage lenders to raise rates multiple times, as noted by Matthew Graham, COO at Mortgage News Daily.