Mortgage Demand Drops as Rates Jump to Highest Since August

A house for sale in Arlington, Va., on July 13, 2023. Saul Loeb/AFP via Getty Images

Mortgage application volume saw a significant drop last week as interest rates jumped to their highest level since August, according to the Mortgage Bankers Association’s (MBA) latest weekly survey, which showed a cooling in both refinance and purchase activity.

The MBA announced in an Oct. 9 press release that overall mortgage application volume fell 5.1 percent for the week ending Oct. 4, with mortgage refinance activity experiencing a sharper 9 percent decline. Purchase activity saw a slight 0.1 percent dip.

The mortgage originations dropped as the average interest rate for 30-year fixed-rate mortgages rose to 6.36 percent, up from 6.14 percent the previous week, marking the highest level in two months.

“In the wake of stronger economic data last week, including the September jobs report, mortgage rates moved higher, with the 30-year fixed rate rising to 6.36 percent—the highest since August,” Mike Fratantoni, MBA’s senior vice president and chief economist, said in a statement.

Mortgage rates track closely with the 10-year U.S. Treasury yield, which on Oct. 7 broke above 4 percent for the first time since summer, after climbing over 20 basis points last week following the release of September’s robust job creation data.

Some experts say that the recent rise in the 10-year yield aligns with historical patterns following the Federal Reserve’s commencement of a rate-cutting cycle.

“That’s not unusual. It likely persists for a bit,” ING’s regional head of research for the Americas, Padhraic Garvey, wrote in a recent note, pointing out that the 10-year yield rose by 20–50 basis points after the first cut of a new rate-cutting cycle during the 1990s and into the new millennium.

At its most recent policy meeting on Sept. 18, the Federal Reserve delivered a jumbo interest rate cut of 50 basis points, sending the 10-year Treasury yield on an upward trajectory. According to Garvey, the yield is likely to remain elevated until there’s a market catalyst, possibly in the form of a disappointing jobs report.

“History also shows that the 10-year yield ultimately hits a level lower than seen at the first cut. A material sub-optimal payrolls number can spark that move. Till then, it’s up,” Garvey wrote.

In a follow-up note, Garvey predicted that the 10-year yield—which offers clues as to the future path of mortgage rates—would retreat to the 3.5–3.7 percent level over the remainder of 2024, before slowly trending toward the 4.5 percent mark.

Despite the overall decrease in mortgage applications last week, the MBA’s Fratantoni expressed some optimism for the housing market’s resilience.

“The decision to buy a home is impacted by many factors, not just the level of mortgage rates,“ Fratantoni said. ”The largest constraint for many prospective homebuyers over the past year had been the lack of inventory. Now, there are more homes available in many markets across the country, and with mortgage rates still low compared to recent history, at least some potential homebuyers are moving ahead.”

Sales of both new and existing homes in the United States fell in August, the latest month of available data. Existing home sales fell 2.5 percent, according to the National Association of Realtors (NAR), while U.S. new home sales declined 4.7 percent, per recent data from the Commerce Department.

NAR Chief Economist Lawrence Yun predicted at the end of September that homebuying activity would pick up when rising inventory combines with falling mortgage rates.

“The rise in inventory–and, more technically, the accompanying months’ supply–implies homebuyers are in a much-improved position to find the right home and at more favorable prices,” Yun said in a statement.

Total housing inventory at the end of August was 1.35 million units, up 0.7 percent from July and 22.7 percent higher than a year ago, per NAR.