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Mortgage application rises as interest rates decline

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Mortgage application soars as interest rates dip

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Mortgage application volume is finally rising again after months of declines, with homeowners and prospective buyers moving to lower mortgage rates.

Changes

According to the Mortgage Bankers Association’s seasonally adjusted index, applications rose 3.2% higher than last week’s previous week.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances slightly increased last week, going from 6.41% to 6.42%.

As a result, the points increased to 0.64 from 0.63 for loans with a 20% down payment.

However, the trajectory for rates has dropped for the past month after government reports showed inflation cooling.

Tuesday interest rates

Following the release of the November consumer price index on Tuesday, interest rates fell.

Mortgage News Daily reported that the average rate on the 30-year fixed mortgage dropped to 6.28%.

Currently, the rate is at its lowest level since mid-September.

The decline follows a lower-than-expected reading of November’s consumer price index.

The report’s release prompted investors to rush into US Treasury bonds, causing yields to drop.

Bond market

“The second consecutive month of reassuring CPI data continues to build a case that inflation has turned a corner,” said Matthew Graham, the chief operating officer at Mortgage News Daily, on Tuesday.

“But rates will be careful about reading too much into that potential shift given the volatility of the data in recent months.”

“The bond market will also want to see what the Fed does with this info in tomorrow’s updated Fed rate forecasts in the dot plot.

Read also: Mortgage rates tipped to remain as is while interest rates go up

Rate movement

At the start of 2022, mortgage rates rose, accelerating in the spring and summer.

By the end of October, the 30-year-fixed went from around 3% to over 7%.

According to a read from the National Association of Realtors, sales of existing homes fell for nine straight months and were down 24% in October year-over-year.

However, rates sharply declined in November after the October CPI reported cooling inflation.

The November rate concluded at 6.63%.

Some cautiously suggested that the dropped rates might bring buyers back to the market.

Luxury homebuilder Toll Brothers CEO, Doug Yearley, spoke at the company’s quarterly earnings call with analysts last week, highlighting the brief August rate drop.

“There are some very very modest green shoots over the last few weeks, as rates have come down,” said Yearley.

“But I am not ready to get sucked back into the conversation we had in August when we felt better.”

Demand

According to real estate brokerage Redfin, homebuyer demand started ticking up in November.

The company’s demand index was up 1.5% from a month earlier.

However, it was also down 20% from a year earlier during the four weeks ending November 27.

“There have been a handful of pieces of relatively good news for the housing market lately, but we’re far from out of the woods,” said Taylor Marr, the deputy chief economist for Redfin.

“Key indicators of homebuying demand will likely be teetering on a knife’s edge with every data release that comes out related to the Fed’s path to eventually bringing rates down.”

Rate locks

The optimism didn’t translate into higher mortgage rate locks for homebuyers, which generally indicate future home sales.

Black Knight, the mortgage tech and data firm, reported that the rate locks fell 22% in November compared to October.

Additionally, the rate locks were down 48% year-over-year.

“It’s still extremely unaffordable even with rates coming down, even with prices coming down in each of the last four months,” said Andrew Walden, the vice president at Black Knight.

“We’re still less affordable than when we were at the peak of the market in 2006, and you’re seeing that play out in the rate lock numbers.”

Walden also highlights the inventory is still 40% shy of where it should be while the homebuilders continue pulling back and potential sellers remain on the sidelines.

Despite weakening prices and rates coming down, both are still substantially higher than should be compared with incomes that make housing affordable by historical standards.

“As we move throughout 2023, you’re going to see prices continue to soften. You’re going to see incomes hopefully continue to grow and eat up some of that gap,” said Walden.

“I think, likely, we are going to see rates come down from where they are today, but it’s going to take an extended period of time to get there.”

Mortgage applications

Last week, mortgage applications to refinance home loans rose by 3%.

However, they were still 85% lower than the same week a year ago.

Meanwhile, the drop in rates from a high of over 7% in October added to the small pool of potential borrowers who could benefit from a refinance.

The applications to purchase a home rose to 4% for the week, 38% lower than the same week in 2021.

The annual comparison is currently shrinking as rates drop.

Joel Kan, an MBA economist, wrote a release, saying:

“The ongoing moderation in home-price growth, along with further declines in mortgage rates, may encourage more buyers to return to the market in the coming months.”

Read also: What Raising Mortgage Rates Mean For First Time Home Buyers

Rates and demand

With lower rates, demand has shrunk, allowing for adjustable-rate mortgages.

ARMs dropped 7.7% of total applications last week from 13% in October.

Although ARMs offer lower rates, they also have a higher risk as they adjust at the end of their fixed terms to the market rate by then.

Despite the mortgage rates dropping after the Tuesday CPI report, they could move markedly again on Wednesday, following the Federal Reserve’s announcement on its latest move on interest rates.

“A friendly enough Fed could easily break the range, but we have our doubts as to how much fuel the Fed will want to add to the fire,” said Mortgage News Daily chief operating officer Matthew Graham.

“If anything, the Fed is more likely to try to temper the exuberance because the exuberance is counterproductive to the Fed’s goals.”

References:

Mortgage rates drop after CPI report, but the housing market is far from out of the woods

Mortgage demand inches higher as interest rates move lower

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