As rates surged last week, demand for FHA purchase loans dropped by nearly 8 percent, according to a weekly lender survey by the Mortgage Bankers Association released Wednesday.

Rising mortgage rates are starting to take a toll on homebuyer demand, particularly among first-time buyers who are the most affected by scarce inventory and affordability constraints, according to a weekly lender survey by the Mortgage Bankers Association (MBA).

The MBA’s latest Weekly Mortgage Application Survey showed requests for purchase loans fell last week by a seasonally adjusted 3 percent when compared to the week before, and were down 9 percent from a year ago.

Demand for FHA purchase loans dropped even more steeply, falling 7.9 percent week over week, and the average purchase loan request swelled to $452,600, the MBA said.

Joel Kan

“The hot job market and rapid wage growth continue to support housing demand, despite the surge in rates and swift home-price appreciation,” MBA forecaster Joel Kan said in a statement. “However, insufficient for-sale inventory is restraining purchase activity. Additionally, the elevated average purchase loan size, and steeper 8 percent drop in FHA purchase applications, are both indicative of first-time buyers being disproportionately impacted by supply and affordability challenges.”

The MBA survey showed requests to refinance dropped even more precipitously, falling 10 percent week over week, and 62 percent from a year ago. Because fewer homeowners can now qualify to lower their mortgage rate, requests to refinance accounted for 38.8 percent of all applications, compared to 51 percent a year ago.

For the week ending April 1, the Mortgage Bankers Association reported average rates for the following types of loans:

  • For 30-year fixed-rate conforming mortgages (loan balances of $647,200 or less), rates averaged 4.90 percent, up from 4.80 percent the week before. Although points decreased to 0.53 from 0.56 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans, the effective rate also increased.
  • Rates for 30-year fixed-rate jumbo mortgages (loan balances greater than $647,200) averaged 4.51 percent, up from 4.40 percent the week before. Although points decreased to 0.34 from 0.44 (including the origination fee) for 80 percent LTV loans, the effective rate also increased.
  • For 30-year fixed-rate FHA mortgages, rates averaged 4.90 percent, up from 4.66 percent the week before. While points decreased to 0.68 from 0.71 (including the origination fee) for 80 percent LTV loans, the effective rate also increased.
  • Rates for 15-year fixed-rate mortgages averaged 4.11 percent, up from 4.01 percent the week before. Points decreased to 0.53 from 0.55 (including the origination fee) for 80 percent LTV loans, but the effective rate also increased.
  • For 5/1 adjustable-rate mortgages (ARMs), rates averaged 3.82 percent, up from 3.70 percent the week before. Points decreased to 0.46 from 0.54 (including the origination fee) for 80 percent LTV loans, but the effective rate also increased.

Mortgage rates have been marching upward this year as Federal Reserve policymakers tighten monetary policy to fight inflation.

Fed policymakers on March 16 approved a 25-basis-point increase in the federal funds rate, the first short-term interest rate hike since 2018, and have made it clear several more increases are likely this year.

The Fed had previously wound down an emergency bond buying program launched at the outset of the pandemic to keep interest rates low. At its height, the quantitative easing program added $120 billion in Treasurys and mortgage-backed securities to the Fed’s balance sheet each month.

Now the Fed is preparing bond markets for its next big move: Running off the nearly $9 trillion in government debt and mortgage-backed securities the central bank is carrying on its balance sheet.

Long-term interest rates surged sharply Tuesday after Federal Reserve Board Governor Lael Brainard — who is viewed as a “dove” on inflation who generally opposes drastic tightening — warned that the Fed may begin running off its balance sheet as soon as next month, and could do so “at a rapid pace.”

Speaking via webcast at a research conference, Brainard said she expected the Fed’s moves to shrink its balance sheet “will contribute to monetary policy tightening over and above the expected increases” in the short-term federal funds rate.

“It is of paramount importance to get inflation down,” Brainard said in her prepared remarks. “Accordingly, the [Federal Open Market] Committee will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting.”

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Email Matt Carter

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