Interest rate hike causes decrease in mortgage demand

The real estate market experienced a surge in mortgage rates last week, reaching its highest level since May. Consequently, this increase had a negative impact on mortgage demand.

According to the Mortgage Bankers Association, total mortgage application volume dropped by 4.4% compared to the previous week, resulting in the lowest demand in a month.

For 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less), the average contract interest rate rose to 6.85% from 6.75%. Moreover, points increased from 0.64 to 0.65 (including the origination fee) for loans with a 20% down payment.

Although this was the average rate for the week, a separate survey by Mortgage News Daily revealed that the rate crossed over 7% last Thursday. Since then, it has remained above 7%, reaching 7.08% this week.

Consequently, the demand for purchasing homes, which had been steadily rising for three consecutive weeks, plummeted by 5% compared to the previous week and was 22% lower than the same week last year.

In a release, Joel Kan, the MBA’s deputy chief economist, emphasized that “Rates are still over a percentage point higher than a year ago, and housing affordability is still a challenge in many parts of the country.” He also noted that the average loan size for a purchase application decreased to $423,500, its lowest level since January 2023.

Kan attributed the drop in loan size to a reduction in homebuying activity in expensive markets and increased activity in lower price tiers.

The number of applications to refinance home loans also experienced a decline, dropping by 4% compared to the previous week and 30% lower than the same week last year. As the summer progresses, the annual comparison is likely to decrease even further, as last summer witnessed a significant increase in mortgage rates for the first time since the pandemic, resulting in a sharp decline in refinance demand.

Although the 30-year fixed rate has remained above 7% for the past week, it may be influenced by upcoming employment data set to be released on Thursday and Friday. This data could shape the Federal Reserve’s next actions, which are expected to include further rate hikes.