Mortgage Demand Falls as Rates Move Back to Over 7 Percent

A house for sale in San Anselmo, Calif., on March 22, 2023. (Justin Sullivan/Getty Images)

Weekly mortgage demand dropped to the lowest in three months as interest rates moved up following a period of decline, signaling a declining home buyer enthusiasm in the country.

The Market Composite Index, a measure of mortgage loan application volume, fell by 5.7 percent for the week ending May 24 from the previous week. This is the “lowest level since early March,” said Joel Kan, vice president and deputy chief economist at Mortgage Bankers Association (MBA), in a statement.

Both refinance and purchase applications fell during this period, he noted.

“Mortgage rates increased for the first time in four weeks, with the 30-year fixed rate up to 7.05 percent and all other loan types also seeing increases. The uptick in rates led to a decline in mortgage applications heading into Memorial Day weekend,” he added.

Borrowers remain sensitive to even small increases in mortgage rates while they struggle to find homes within their price range amid limited existing home inventory, Mr. Kan noted.

According to Freddie Mac data, the 30-year fixed-rate mortgage rate rose to 7.03 percent for the week ending May 30, closing in on the recent peak of 7.22 percent hit earlier in the month. Back in January 2021, when President Joe Biden entered the White House, the rate was 2.77 percent.

Sam Khater, chief economist at Freddie Mac, attributed the recent week’s rise in mortgage rates to “more hawkish commentary about inflation” and lukewarm demand for longer-dated Treasurys. Lower expectations of interest rate cuts by the U.S. Federal Reserve also contributed to pushing up mortgage rates, he said.

MBA data revealed that delinquency rates for mortgage loans rose by 6 basis points from the fourth quarter of 2023 to 3.94 percent of all outstanding loans at the end of the first quarter of 2024.

Marina Walsh, vice president of industry analysis at MBA, said the increase in delinquency rates was due to “higher unemployment, lower personal savings, increases in property taxes and insurance, and a run-up in credit card debt and delinquency,” making conditions difficult for homeowners.

With rates rising, home price cuts have hit the highest level in 18 months, according to a report by real estate brokerage Redfin.

For the four weeks ending May 26, 6.4 percent of home sellers reduced their asking price nationwide, the brokerage said. The median asking price for a home fell roughly $3,000 to $416,623, which was the first decline in six months.

The age of inventory, which refers to how long active home listings have been on the market, began rising on an annual basis in May for the first time in eight months, hitting a median of 46 days.

These metrics suggest that “sale-price growth could soften in the coming months as persistently high mortgage rates turn off homebuyers,” Redfin said.

Fed Resistant to Decreasing Interest Rates

The rise in mortgage rates is tied to the Fed’s decision to raise interest rates to combat inflation. The Fed has raised interest rates from 0.25 percent in March 2022 to a range of 5.25–5.50 percent in July 2023 and has remained at that level until now.

Rates on 30-year fixed-rate mortgages had risen to 4.16 percent by mid-March 2022 in response to inflation and then jumped to over 7 percent. For mortgage rates to come down, it is necessary for interest rates to head downward.

This requires that inflation comes below the Fed’s 2 percent target. Annual inflation has remained above 3 percent since June 2023.

The market was expecting the Fed to start cutting rates in 2024 as early as possible, given lower inflation.

However, Fed Chair Jerome Powell suggested last month that it may not be “appropriate to lower our policy rate until we have greater confidence that inflation is moving sustainably down toward 2 percent.”

The Fed left interest rates unchanged at its last meeting. The next meeting is set for June. As of 12:30 p.m. EST on May 31, according to data from the CME FedWatch tool, interest rate traders see a zero percent chance that rates will be reduced in the June meeting.

Traders expect rates to drop in September, with over 46 percent holding such a view.

The MBA expects 30-year fixed-rate mortgage rates to average 6.4 percent in 2024. Meanwhile, the National Association of Realtors is projecting rates to be at 6.8 percent for the year.

High home prices and elevated mortgage rates are creating a housing affordability crisis.

The monthly housing payment for a typical homebuyer is a “record-high” of $2,886, up from $1,500 in March 2019. Meanwhile, the typical downpayment for someone putting down 20 percent is now $84,000, up from $56,800.

Meanwhile, some buyers choose to purchase their dream home despite high rates, unwilling to risk even costlier purchases if they wait.

“High mortgage rates aren’t deterring buyers as much as they were last year; a lot of people want to get in now before prices go up more,” Miami Redfin agent Rachel Riva said in March.