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A modest pullback in mortgage rates is perking up interest in refinancing, but the combination of elevated home prices and rates is suppressing homebuyer demand, according to a weekly survey of lenders by the Mortgage Bankers Association.
Requests for purchase loans were down a seasonally adjusted 4 percent last week compared to the week before and were essentially unchanged from a year ago, the MBA survey found.
Applications to refinance were up 12 percent week over week and 17 percent from a year ago, as rates for 30-year fixed-rate loans pulled back to the lowest level in six weeks, said MBA Deputy Chief Economist Joel Kan.
Joel Kan
“Purchase activity had a tougher week, with declines across all loan types,” Kan said, in a statement. “The average loan size for a purchase loan has increased since the start of the year and continued that trend last week with weaker government purchase activity, which reached $447,300, the highest level since October 2024.”
As a result, requests to refinance accounted for 39 percent of all mortgage applications last week, up from 37 percent the week before.
After hitting a 2024 low of 6.03 percent on Sept. 17, rates on 30-year fixed-rate conforming mortgages climbed above 7 percent in January for the first time since May 2024, according to rate lock data tracked by Optimal Blue.
Modest pullback in rates
While rates on 30-year fixed-rate mortgages have pulled back modestly from a 2025 high of 7.05 percent on Jan. 14, mortgage industry economists expect rates on home loans will remain elevated for the remainder of this year — and that there’s little chance that sales of existing homes will come charging back after hitting the lowest level in 30 years in 2024.
After hitting a post-pandemic peak of 7.2 percent in June 2022, annual inflation dipped to 2.1 percent in September, allowing the Fed to cut rates three times in the final months of 2024.
Inflation proving to be stubborn
But inflation has proved to be more stubborn since then, drifting back upward to 2.6 percent in December, according to the latest reading of the Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) price index.
On Jan. 29, the Fed put further rate cuts on hold and continued “quantitative tightening” that is putting upward pressure on rates by trimming government bonds and mortgage debt from the central bank’s books.
While futures markets tracked by the CME FedWatch tool show investors don’t expect the Fed to start cutting rates again until June, economists at Pantheon Macroeconomics think the economy is cooling faster than many investors realize.
Employers scaled back hiring in the final month of 2024, with the number of job openings shrinking by 566,000 from November to December, to 7.6 million, according to data released Wednesday by the Bureau of Labor Statistics.
Job openings were down 1.3 million from a year ago, according to the Job Openings and Labor Turnover Summary (JOLTS) for December.
“December’s JOLTS report suggests [Fed policymakers] still need to ease further to stabilize labor demand and prevent core PCE inflation from ultimately undershooting the 2 percent target,” economists at Pantheon Macroeconomics said in their Feb. 5 U.S. Economic Monitor.
Forecasters at Pantheon Macroeconomics expect yields on 10-year Treasury notes to drop by nearly three-quarters of a percentage point by the end of the year, to 3.75 percent. If mortgage rates were to follow, that implies rates on 30-year fixed-rate mortgages would drop to around 6.2 percent.
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