Increase in Mortgage Demand Fueled by Robust Sales of New Homes

Last week witnessed a resurgence in mortgage rates. However, this increase failed to deter the demand for mortgages, as prospective buyers eagerly sought newly constructed homes. 

According to the Mortgage Bankers Association’s seasonally adjusted index, there was a 3% rise in total mortgage application volume compared to the previous week. An additional adjustment was made to account for the Juneteenth holiday.

While applications for purchasing homes increased by 3% for the week, they were 21% lower compared to the same period last year. Surprisingly, these applications have been steadily rising for three consecutive weeks, reaching the highest level since early May, despite prevailing high mortgage rates. 

“Newly built homes have been the driving force behind the surge in purchase activity in recent months, as buyers explore options beyond the existing-home market,” remarked Joel Kan, the Mortgage Bankers Association’s Vice President and Deputy Chief Economist, in a press release. “The existing-home sales market remains stunted due to the scarcity of available properties for sale, with many potential sellers holding onto their lower-rate mortgages.”

A report released on Tuesday by the U.S. Census indicated that sales of newly constructed homes in May skyrocketed 12% compared with April and were 20% higher than May 2022. Builders are effectively stimulating demand by offering incentives, such as subsidizing mortgage rates [source].

For 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less), the average contract interest rate increased from 6.73% to 6.75% last week. Meanwhile, the average rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $726,200) experienced a more pronounced rise, climbing from 6.80% to 6.91%. Notably, this marks the third consecutive week where the jumbo rate surpassed that of the conforming rate. Joel Kan highlighted that historically, the jumbo rate had averaged around 30 basis points lower than the conforming rate between May 2022 and May 2023. 

The wider spread between jumbo and conforming rates, along with the increase in the jumbo rate, can be attributed to recent failures among regional banks. Since Fannie Mae and Freddie Mac don’t purchase loans of that size, lenders retain jumbo loans on their balance sheets. Consequently, bank credit, particularly at community banks, has significantly tightened, leading to higher rates.

While applications to refinance a home loan rose by 3% for the week, they were 32% lower compared to the corresponding period one year ago. A majority of borrowers today currently hold mortgages with interest rates below 4%.