Mortgage Applications Plunge After Warning Sign About Interest Rates

Mortgage applications plunged as home loan rates jumped to their highest in two months, according to the Mortgage Bankers Association (MBA), scaring away buyers who are struggling to afford homes amid elevated prices due to low supply of properties available in the market.

The 30-year fixed rate mortgage rose to a little over 7 percent for the week ending February 16 from about 6.90 the previous week, sending applications for home loans down by close to 11 percent, the MBA said on Wednesday. Meanwhile, refinancing also slowed as the index tracking that side of the business dropped 11 percent.

After rates fell from their peak of 8 percent in the fall to the mid-6 percent to begin the year, they have ticked up over the last week on the back of news that suggest that the economy is still robust and keeping inflation high. That dynamic has convinced investors that the Federal Reserve is likely to keep borrowing costs higher for longer after they hiked them to two-decade highs to contain soaring prices beginning in March 2022.

“Mortgage rates moved back above 7 percent last week following news that inflation picked up in January, dimming hopes of a near term rate cut,” Mike Fratantoni, MBA’s chief economist, said in a statement shared with Newsweek.

“Mortgage applications dropped as a result with a larger decline in refinance applications. Potential homebuyers are quite sensitive to these rate changes, as affordability is strained with both higher rates and higher home values in this supply-constrained market.”

The ticking up of rates coincides with home prices still staying elevated. In January, homes cost 0.5 percent more than the previous month, which was the same change seen in November, according to real estate platform Redfin. But compared to a year ago price rose nearly 7 percent the largest jump in a year.

Declining rates towards the end of last year did send buyers into the market looking to secure mortgages.

“Price growth held steady last month because many of the home purchases that closed in January were negotiated at the end of last year, when mortgage rates posted the biggest drop since 2008. The decline in rates gave buyers more purchasing power, and for some, a sense of urgency to lock in a mortgage,” Sheharyar Bokhari, Redfin’s senior economist, said in a note.

“Prices also climbed because there’s still a shortage of homes for sale, which is fueling competition in some areas.”

The supply of homes took a hit as construction of new homes “collapsed” in January as housing starts fell by 15 percent. Housing economists found some silver lining in the data that the more forward-looking metric in the data—building permits—rose, suggesting that new homes could come into the market later in the year.

But the key will be what happens to rates, builders say.

“Moderating mortgage interest rates in 2024 will ultimately lead to gains for single-family home building this year,” Alicia Huey, chairperson of the National Association of Home Builders, said last week.

“However, tighter lending conditions and higher costs for construction and development loans are holding back some construction at the start of the year.”