Interest Rate Shock: Mortgage Demand Plummets as Rates Surge Back Above 7%, Signaling a Significant Impact on the Housing Market

Key Points:

• The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) rose to 7.06% from 6.87%.
• Refinance applications decreased by 11% last week compared to the previous week, with a marginal 0.1% increase from the same week last year.
• Mortgage applications for home purchases also declined, dropping 10% for the week and 13% lower than the same week a year ago.

New houses are seen for sale at Woodland Village, built by Lifestyle Homes housing developer, in Cold Springs, Nevada, on June 28, 2023

Mortgage interest rates spiked last week to their highest level since early December, leading to a significant drop in mortgage demand. Total application volume fell 10.6% compared to the previous week, as reported by the Mortgage Bankers Association's seasonally adjusted index.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) rose to 7.06% from 6.87%. Points also increased to 0.66 from 0.65 (including the origination fee) for loans with a 20% down payment.

"Mortgage rates rose above 7 percent last week following reports of increased inflation in January, dampening expectations for a rate cut in the near future," said Mike Fratantoni, the MBA’s chief economist, in a statement.

Refinance applications for home loans declined by 11% last week compared to the previous week, and were only 0.1% higher than the same week last year. A year ago, the 30-year fixed rate was 6.62%. Despite higher rates this year, refinance volume had been exceeding year-ago levels, but the recent rate surge made refinancing unappealing for most borrowers.

Applications for mortgages to purchase a home dropped by 10% for the week and were 13% lower than the same week a year ago. This marked the lowest level since early November 2023.

Fratantoni added, "Potential homebuyers are quite sensitive to these rate changes, as affordability is strained with both higher rates and higher home values in this supply-constrained market."

With rates rising, the share of adjustable-rate mortgages (ARMs) in total applications increased to 7.4%. ARMs offer lower initial interest rates but are considered riskier because they can adjust higher after a fixed period.

Mortgage rates rose further on Friday following a monthly government report on wholesale prices, which showed persistent and higher-than-expected inflation. Rates have remained relatively stable to start this week.