Purchase loan applications fell 29 percent from the same period last year, the result of rising rates that are double their levels from 2021, according to the Mortgage Bankers Association’s weekly index.

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This story was updated Thursday, September 15, 2022 to reflect new data from Freddie Mac.

Purchase loan activity showed some signs of life last week even as mortgage rates continued their upward climb, but the home market is still feeling the deep-cutting effects of a yearlong decline in demand for mortgages of all types.

Mortgage loan applications declined 1.2 percent on a seasonally adjusted basis the week ending Sept. 9, compared to the week before, according to the Mortgage Bankers Association’s weekly market composite index.

“The 30-year fixed mortgage rate hit the six percent mark for the first time since 2008 – rising to 6.01 percent – which is essentially double what it was a year ago,” MBA Associate Vice President of Economic and Industry Forecasting Joel Kan said in a news release.

It’s the latest step in a stark yearlong drop in demand for home loans. Purchase loan applications were down 29 percent from the same period the year before, the result of rising rates that are double their levels from last year, as well as sky-high sale prices.

With the higher rates, homeowner interest in refinancing has plummeted, leading to cost-cutting and layoffs by many mortgage businesses. In recent months, the rates have combined with record-high home prices to dissuade buyers from taking out as many purchase loans as well.

“Higher mortgage rates have pushed refinance activity down more than 80 percent from last year and have contributed to more homebuyers staying on the sidelines,” Kan said in the release.

Still, not all buyers were pushed out of the market. 

Demand for purchase loans actually ticked up slightly the week ending Sept. 9, rising a seasonally adjusted 0.2 percent from the week before.

More potential homebuyers took out government loans in particular. This weekly trend was driven partly by renewed interest in Veterans Affairs and U.S. Department of Agriculture loans, Kan said in the statement.

Below are the weekly changes in average mortgage rates according to MBA’s survey, broken down by each type of loan. 

Weekly change in average mortgage rate, by loan type

  • 30-year fixed rate (conforming): 6.01%, up from 5.94%
  • 30-year fixed rate (jumbo): 5.56%, up from 5.46%
  • FHA-backed rate: 5.71%, up from 5.61%
  • 15-year fixed rate: 5.30%, up from 5.23%
  • 5/1 adjustable rate: 4.83%, up from 4.81 percent *

* The effective rate for 5/1 adjustable-rate mortgages decreased week-over-week, after accounting for points used to buy down the rate. The effective rates for all other loan types increased over the same period.

Mortgage rates rebound

The Optimal Blue Mortgage Market Indices, which are updated daily, showed rates for 30-year fixed-rate mortgages hitting a new 2022 high of 6.09 percent Tuesday, following a Bureau of Labor report showing inflation remains persistent in core categories including housing.

Federal Reserve Chair Jerome Powell has warned that the Fed will continue to fight inflation “forcefully” even if that brings “some pain to households and businesses.”

The latest inflation numbers sent stocks tumbling Tuesday, with investors growing more certain that Federal Reserve policymakers will continue raising the short-term federal funds rate in 75-basis point increments at its upcoming meetings.

The CME FedWatch Tool, which monitors futures contracts to calculate the probability of Fed rate hikes, shows traders this week pricing in a 70 percent chance of a 75-basis point hike in the short-term federal funds rate on Sept. 21, and a 55 percent of another big hike on Nov. 2. Historically, the Fed has tended to make smaller adjustments of 25 basis points when raising short-term interest rates.

Although the Fed doesn’t have direct control over mortgage rates, it’s also been withdrawing the support it provided to mortgage markets during much of the pandemic to keep rates low. At its height, the Fed’s “quantitative easing” program was adding $40 billion in mortgage-backed securities and $80 billion in U.S. Treasurys to the Fed’s balance sheet every month, helping drive mortgage rates to record lows.

New data released Thursday as part of Freddie Mac’s primary mortgage market survey also showed rates for 30-year fixed mortgages exceeding 6 percent for borrowers with 20 percent down and excellent credit. It’s the first time since 2008 that highly qualified borrowers qualified for rates this high, Freddie Mac said.

Quantitative easing now tightening

Assets held by the Federal Reserve through quantitative easing purchases now include $5.69 trillion in long-term Treasurys and $2.7 trillion in mortgage-backed securities. Source: Board of Governors of the Federal Reserve System, Federal Reserve Bank of St. Louis.

After gradually winding that program down, the Fed this summer reversed course and began “quantitative tightening” to trim its nearly $9 trillion balance sheet by letting maturing assets roll off its books. The pace of quantitative tightening has gradually ramped up to twice the initial pace in June, when the Fed capped rolloffs of mortgage-backed securities at $17.5 billion a month, and Treasurys at $30 billion.

“Starting this month, the Fed is shedding $60 billion a month in Treasury securities and up to $35 billion a month in agency mortgage-backed securities,” Fed board member Christopher Waller said last week in a speech in Vienna, Austria. “This action effectively increases the supply of securities in the hands of private investors and will thus put upward pressure on interest rates, as private investors must now be enticed to hold these assets.”

Email Daniel Houston

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