Mortgage Demand Continues to Fall, Hitting 25-Year Low

Real Estate

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Last week, demand for mortgages in the United States dropped for the fourth consecutive month, hitting the lowest level in a quarter-century. Demand is falling amid aggressive interest rate tightening by the Federal Reserve this year.

Mortgage demand fell 4.5% last week, 38% lower than the same period one year earlier. Refinancing applications similarly dropped, falling 6.8% last week. Compared to twelve months earlier, refinancing applications were down 86%.

Record-low interest rates during the pandemic drove many borrowers to refinance at more favorable terms. As a result, with multiple interest rate hikes this year, the number of borrowers who might benefit from refinancing is at a record low.

Thirty-year fixed-rate mortgages in the United States now sit around 7%, up from just over 3% one year earlier.

According to economist Joel Kan, this is predictably slowing the housing market.

He said, “The speed and level to which rates have climbed this year have greatly reduced refinance activity and exacerbated existing affordability challenges in the purchase market. Residential housing activity ranging from new housing starts to home sales have been on downward trends coinciding with the rise in rates.”

Rising rates bring higher monthly mortgage payments, and prospective buyers are struggling to afford a home. Potential homebuyers are turning to adjustable-rate loans (ARMs) offering lower rates.

Unlike traditional, fixed-rate mortgages, where the interest rate remains consistent for the loan term, ARMs incorporate fluctuating rates that change at predetermined periods.

Typically, with ARMs, borrowers will be offered a lower introductory rate before the rate increases or decreases after an established period of time.

ARMs also differ from variable-rate mortgages. With variable-rate mortgages, the rate is floating, while the payment typically remains consistent. ARMs similarly have floating rates, but the monthly amount can change as interest rates shift.

More and more, homebuyers are selecting adjustable-rate loans as their preferred mortgage structure. Last week, ARMs made up 12.8% of all mortgage applications, the highest share since 2008 during the Global Financial Crisis.

Unsurprisingly, rising rates and diminished demand have impacted homebuilder sentiment. The National Association of Home Builders Housing Market Index dropped for the tenth consecutive month in October. At 38, the index was well below market forecasts of 43 and is now half the level it was just six months ago   

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