The US mortgage demand fell last week as the country saw interest rates rise to the highest level in nearly two months. According to the Mortgage Bankers Association’s (MBA) seasonally adjusted index, the total mortgage application volume has decreased by 10.6% compared to the previous week.
US Mortgage Demand Falls
The average contract interest rate for 30-year-fixed-rate mortgages for loans of $766,550 or less increased from 6.87% to 7.06%, with points rising from 0.65 to 0.66 (including the origination fee) for loans where the buyer pays a 20% down payment.
Last week, applications to refinance a home loan dropped by 11% compared to the week before. The figure was only slightly higher by 0.1% than the same week a year ago when the 30-year-fixed rate was 6.62%. Even though rates have been higher this year, more people were refinancing their loans than last year. However, the sudden rate increase that happened last week has made refinancing seem not worthwhile to most borrowers.
The number of people applying for a mortgage dropped by 10% last week. Compared to the same week last year, the number of applications has decreased by 13%. This has marked the lowest level of applications since early November 2023, reflecting a decrease in US mortgage demand.
Due to higher rates, the proportion of adjustable-rate mortgages (ARMs) in total applications has risen to 7.4%. ARMs usually have lower initial interest rates but are considered riskier as the rates can go up after the initial fixed period is over.
Mike Fratantoni, the MBA’s chief economist, has said in a release that the rates have gone back above 7% after the news of inflation increasing in January was released. These circumstances make the possibility of a near-term rate cut even smaller. He added that this market condition has stressed potential homebuyers and reduced US mortgage demand, as it is becoming harder to afford homes due to higher rates and prices in a market with limited supply.
When Will Mortage Rates Decrease?
Most economists in a Reuters poll think that the US Federal Reserve will lower the federal funds rates in June, and there is a higher chance that the rate cut might happen later than expected rather than earlier. According to the previous Reuters surveys, the first rate cut had been predicted in the middle of the year.
Even though the stock markets have reached all-time highs, the US 10-year Treasury has increased by almost 0.5% to 4.28% this month alone. This increase indicates strong economic growth, a competitive job market and persistent inflation.
In a recent Reuters poll, 86 out of 104 economists predicted that the Feds would cut the interest rate, which is currently between 5.25% and 5.50%, in the next quarter. However, 53 out of 104 economists believe June is the most likely month for this rate cut. Another 33 economists believe it might happen in May, while the remaining expect the first reduction sometime in the second half of 2024. None of the economists predicted a rate cut in March, a change from the 16 who did in the previous poll.
The Fed’s Personal Consumption Expenditure (PCE) inflation is expected to be around 2% in the second half of 2024. However, other measures of inflation, like CPI, Core CPI, and Core PCE, are predicted to remain above the Fed’s target until at least 2026.
The American economy grew by a better-than-expected 3.3% last year. Economists predict that it will grow by an average of 2.1% this year, which is higher than the 1.8% rate that the Fed considers non-inflationary. Michael Gapen, chief US economist at Bank of America, has said currently, the risks to the growth forecast are slightly higher however, if this keeps the inflation high, then there is the possibility that the Feds might keep the interest rates up for a longer time than what is being predicted.
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