Mortgage interest rates increased to their highest level since early May compared to last week. This increase in mortgage rates led to a decrease in mortgage demand for the second consecutive week. Last week, total mortgage applications decreased by 5.2% compared to the week before, as reported by the Mortgage Bankers Association’s adjusted index, which also factored in the Memorial Day holiday.
The Decrease in Mortgage Demand
The average interest rate on 30-year fixed-rate mortgages for loans up to $766,550 increased slightly to 7.07%, with associated points climbing from 0.63 to 0.65 for mortgages requiring a 20% down payment.
Mike Fratantoni, MBA’s SVP and chief economist, recently said mortgage rates increased last week, hitting 7.07% for 30-year conforming loans, the highest since early May. Mike added that this occurred even though recent data showed signs of slightly slower economic growth.
Refinance applications dropped by 7% from last week but remained 5% higher compared to a year ago. Although mortgage rates are slightly higher than last year, some borrowers might refinance to withdraw from home equity.
Applications for home purchases decreased by 4% this week and are down 16% from a year ago. However, increasing interest rates are not the only challenge for buyers. With home prices increasing, competition remains strong, especially in lower-priced homes.
What Do Economists Think
Fratantoni explained that government purchase volume did not drop as much. This is mainly because of an increase in VA applications. The market depends on first-time homebuyers’ demand, and many still rely on government lending programs.
He added that mortgage rates took a sharp decrease at the end of last week, and this decline continued into the current week. Additionally, an employment report released on Tuesday revealed that job openings in April were lower than anticipated.
Matthew Graham of Mortgage News Daily said that lower job openings typically mean lower rates, assuming other factors remain constant. He added that the government’s upcoming monthly employment report, scheduled for Friday, will carry huge weight in determining future interest rates.
Graham added that this suggests some expectation that the rest of the week’s data might also be negative. The risk is if the data unexpectedly improves, causing rates to jump back up.
Joel Kan, MBA’s vice president and deputy chief economist, said in a statement that the application volume for both purchases and refinances dropped this week and is well below last year’s levels. He also added that the share of adjustable-rate mortgages (ARMs) is at its highest this year, reaching 7.8%. Homebuyers are turning to ARMs, which have rates in the mid-6% range for the first 5 years, to make homeownership more affordable.
The MBA survey showed the average mortgage rate for 30-year fixed loans with conforming balances ($766,550 or less) rose to 7.29% from 7.24% last week.
Economists expect mortgage rates to stay high in early 2024 and only decrease when the Federal Reserve cuts rates. However, they will not likely return to pandemic lows. Additionally, investors doubt a Fed rate hike this year due to higher-than-expected inflation reports early in the year.
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