Mortgage demand increases when interest rates decrease

A For Sale sign appears in front of a home on Oak Street in Patchogue, New York on May 17, 2022.

Steve Post | news day | Getty Images

After a month of decline, mortgage application volume is increasing as current homeowners and potential buyers move to lower mortgage rates.

According to the Mortgage Bankers Association’s seasonally adjusted index, applications rose 3.2% last week compared to the previous week.

The average contract rate on 30-year fixed-rate mortgages with matching loan balances ($647,200 or less) edged up to 6.42% from 6.41% last week, with points rising from 0.63 (including the setup fee) to 0.64 Loan with 20% deposit. But the yield curve was lower last month as government reports showed inflation cooling. Interest rates slipped Tuesday after the release of the November consumer price index.

Mortgage applications to refinance a home loan rose 3% last week from the previous week but were still 85% lower than the same week a year ago. The fall in interest rates from a high of just over 7% in October widened the still tiny pool of potential borrowers who could benefit from a refinance.

Mortgage applications to buy a home rose 4% on the week and were 38% lower than the same week a year ago. That year-on-year comparison is now shrinking slightly as interest rates fall.

“The continued slowdown in home price growth, coupled with a further fall in mortgage rates, could encourage more buyers to return to the market in the coming months,” wrote Joel Kan, an MBA economist, in a press release.

Lower interest rates have shrunk demand for adjustable rate mortgages. ARMs fell to 7.7% of all applications over the past week from just under 13% in October, when rates were much higher. ARMs offer lower interest rates but higher risk as they ultimately adjust to the then prevailing market interest rate at the end of their fixed term.

While mortgage rates fell after Tuesday’s CPI report, they could move significantly again on Wednesday after the Federal Reserve announced its latest rate hike and Fed Chair Jerome Powell followed suit with comments.

“A friendly Fed could easily breach the range, but we have our doubts about how much fuel the Fed plans to throw on the fire,” said Matthew Graham, Mortgage News Daily’s chief operating officer. “If anything, the Fed is more likely to try to moderate the exuberance because the exuberance is counterproductive to the Fed’s goals.”

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