demand for mortgage applications

High Rates Drive Mortgage Applications Demand to 1995 Lows

The demand for mortgage applications witnessed a notable 6% dip last week, marking its lowest point since 1995, reveals the latest survey conducted by the Mortgage Bankers Association (MBA) for the week ending September 29.


This decline coincided with a surge in the average rate for a conventional 30-year loan, which climbed from 7.41% to 7.53% in the preceding week, reaching its highest level since December 2000.


The expected drop in applications reflects the rise in borrowing costs, which has prompted potential buyers to either step back or seek alternative financial strategies. Adjustable-rate mortgages, known for their lower interest rates compared to conventional loans, have gained traction, particularly with 30-year rates consistently exceeding 7%.


Joel Kan, MBA’s Chief Economist, stated, “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. 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.”


Overall, purchase demand registered a stark 22% decrease compared to the same week last year, marking its lowest point since 1996. Kan commented, “Mortgage applications ground to a halt.”


However, some glimmers of hope emerged. The percentage of applications for Federal Housing Administration (FHA) loans saw a slight increase, rising from 14.1% to 14.5% from the previous week. Last week, FHA-backed mortgages offered rates averaging 7.29%, slightly lower than conforming loans.


FHA loans often serve as a viable option for entry-level buyers, offering competitive rates and lower down payment requirements.


In contrast, the share of all loan applications backed by the US Department of Veterans Affairs (VA) slumped from 10.9% to 10.1% from the previous week. The share of USDA loans remained steady at 0.5%.


Additionally, the MBA reported an uptick in ARMs, indicating a willingness among buyers to seek relief from higher rates. For the week ending September 29, the average contract rate for 5/1 ARMs stood at 6.49%, a marked contrast to the 7.53% rate for the typical 30-year fixed conventional loan.


Nonetheless, overall activity remains subdued, with prospective buyers grappling with challenges such as limited inventory and persistently high home prices.


“Rates were the highest of the year,” noted Beatrice de Jong, a real estate broker at The Beverly Hills Estates. “Presently, there are fewer buyers actively searching for homes, leading to reduced competition.”


August witnessed a decline in new home sales, while pending home sales, a harbinger of future closings, also experienced a downturn. Closed sales of pre-owned homes hit a seven-month low.


Encouragingly, inventory levels are showing signs of improvement, potentially providing relief to buyers still on the lookout for homes. As of the week ending October 3, the market now boasts 535,000 single-family homes, marking a 1.3% uptick from the previous week. This is a slight deceleration from the preceding weeks, where inventory was increasing by nearly 2%, according to Altos Research. Nonetheless, there are 5% fewer homes on the market compared to this time last year.


“Fewer offers are being made so inventory builds,” observed Mike Simonsen, CEO of Altos Research in his weekly analysis.


However, there may be more challenges ahead for buyers. The Federal Reserve recently hinted at the possibility of maintaining higher headline interest rates due to ongoing inflation concerns.


“As mortgage rates have continued to climb, most potential buyers have really had no choice but to sit on the sidelines,” noted Simonsen. “For many potential people in the market, it’s really easy for them to take a wait and see attitude.”


In conclusion, the substantial dip in demand for mortgage applications, coupled with surging interest rates, paints a challenging landscape for prospective homebuyers, urging them to navigate a market marked by cautious optimism and economic uncertainties.

Source: Yahoo Finance

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