Mortgage application volume has fallen dramatically, dropping to its lowest level since 1995 according to new data from the Mortgage Bankers Association (MBA). The plunging demand highlights how rapidly rising interest rates are severely impacting the housing market.
For the week ending October 7th, the MBA’s overall seasonally adjusted mortgage index sank 6.9% from the previous week. Demand for mortgage refinancing saw an even steeper 10% decline over the same period.
The most concerning data shows mortgage applications for home purchases were down 6% week-over-week and a startling 21% lower than one year ago. This plunge in purchase demand underscores how unaffordable the housing market has become for many potential buyers.
Driving the historic slump is a rapid rise in mortgage rates, with the average 30-year fixed rate loan now nearing 8% according to Freddie Mac. This is the highest level in over two decades, greatly increasing monthly payments and deterring many prospective homebuyers.
Skyrocketing mortgage rates mean buyers looking to maintain a similar monthly payment must opt for substantially lower-priced homes than a year ago. First-time homebuyers are especially squeezed, with already tight inventory shriveling further at lower price points preferred by this cohort.
The surge in rates has also curtailed refinancing activity as existing homeowners find it no longer makes sense to swap out lower-rate loans. With little incentive to refinance and intense affordability pressures, mortgage lenders are seeing demand evaporate.
As a result, large lenders like Wells Fargo have already begun laying off mortgage staff in anticipation of declining origination volumes. And with housing activity cooling, builders are slowing new construction plans, as evidenced by falling home permits.
The plunge in demand six months into aggressive Fed rate hikes illustrates their profound impact on mortgage markets. And with more increases anticipated and no peak yet in sight, housing headwinds seem poised to intensify further.
Freddie Mac economists predict rates could even breach 7% by early 2023 if inflation remains stubbornly high. This would exacerbate affordability challenges and mortgage demand could deteriorate much further from already depressed levels.
With indicators like mortgage purchase applications plunging, home sales slowing, and builder sentiment remaining low, the once red-hot housing market looks increasingly vulnerable.
The MBA data offers the latest evidence that the Fed’s race to crush inflation is also crushing housing. The market may face a protracted correction as buyers retreat to the sidelines until rates eventually stabilize and home prices reconnect with incomes.
For aspiring homebuyers and the broader housing ecosystem, all eyes will remain glued to mortgage rates and affordability trends. Only once the relentless rate climb levels off can demand and activity hope to find a firmer footing. Until then, the vise grip of rising rates will continue crushing mortgage demand and housing markets nationwide.
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