Mortgage demand nosedives as interest rates cross back over 7%

A key measure of home-purchase applications fell sharply last week as mortgage rates surged to the highest level in two months.

The Mortgage Bankers Association's (MBA) index of mortgage applications tumbled 10.6% for the week ended Feb. 16, compared with a 2.3% drop the previous week, according to new data published Wednesday. 

The data also showed that the average rate on the popular 30-year loan rose to 7.06% last week. While that is down from a peak of 8% in October, it marks the highest level for interest rates since December 2023.

"Mortgage rates moved back above 7 percent last week following news that inflation picked up in January, dimming hopes of a near-term rate cut," said Mike Fratantoni, MBA's chief economist.

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Housing demand has ground to a halt as rates move higher. Applications for a mortgage to purchase a home dropped 10% from the previous week. Application volume is down 13% compared with the same time last year.

Demand for refinancing also fell last week, declining 11% from the previous week, according to the survey. Compared with the same time last year, refinance applications are up just 0.1%.

"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," Frantantoni said.

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The interest rate-sensitive housing market has cooled rapidly as a result of the Federal Reserve's aggressive tightening campaign. Policymakers lifted the benchmark federal funds rate 11 times over the course of 16 meetings in an attempt to crush stubborn inflation and slow the economy. 

Officials signaled during their most recent policy-setting meeting in January that they are done raising interest rates, but are not quite ready to pivot to cutting them yet. Investors had previously penciled in a series of aggressive rate reductions beginning as early as March. 

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Now, most economists expect the cuts to begin in May or June amid signs that inflation remains abnormally high.

Higher mortgage rates are not only dampening consumer demand, they are limiting inventory. That is because sellers who locked in a low mortgage rate before the pandemic have been reluctant to sell with rates continuing to hover near a two-decade high, leaving few options for eager would-be buyers.

Available home supply remains down a stunning 34.3% from the typical amount before the COVID-19 pandemic began in early 2020, according to a separate report published by Realtor.com.