Mortgage applications to purchase a home plunged and to refinance a home collapsed.
By Wolf Richter for WOLF STREET.
The average weekly mortgage rate for conforming 30-year fixed mortgages rose to 7.49% in the current reporting week, the highest since mid-November 2023, according to the Mortgage Bankers Association today.
This measure of the average 30-year fixed mortgage rate had been in the 6-7% range for over four years, but briefly broke out in late 2023. During the normal times, before the Fed’s QE and interest rate repression started in 2008, 7.5% mortgages were considered normal and for many years low (see 50-year chart at the bottom of this article).
In terms of demand for home purchases, that above-7% range is triggering demand destruction at current prices – further demand destruction of already weak demand – given how overpriced the housing market still is.
Mortgage rates track long-term Treasury yields but are higher, and that spread between them varies over time.
Given the jump in the Treasury yields this morning ahead of the 10-year Treasury auction, the daily measure of 30-year fixed mortgage rates jumped to 7.63% this morning, according to Mortgage News Daily.
Mortgage applications to purchase a home – a forward-looking indicator of demand by home buyers – fell further in the current survey week, from already beaten-down levels, the fifth week in a row of declines, according to data by the Mortgage Bankers Association today.
Purchase mortgage applications have been wobbling along near rock-bottom levels for over four years. In the current reporting week, they plunged by 15% year-over-year, by nearly 50% from the same week in 2021, and by 42% from the same week in 2019.
If homeowners want to sell their homes, there is a market, but they have to get real on price. That’s what this says.
In many markets, it’s now far cheaper to rent an equivalent home, than buying it, and home-price increases can no longer be taken for granted to occur and make up the difference. In many markets, home prices started declining in recent years, and we track some of the bigger markets with the biggest home price declines here.
Mortgage applications to refinance a home collapsed by 60% year-over-year in the current reporting week, by 83% from the same week in 2021, and by 79% from the same week in 2019, according to the MBA today.
Refinance applications react strongly to changes in mortgage rates: When mortgage rates dip, homeowners eager to refinance pounce. And when mortgage rates rise after that dip, demand dries up again. Now, with rates at 7.5%, demand for refis has collapsed.
This chart shows that inverse relationship between mortgage rates (blue) and applications to refinance a mortgage (red):
Refis have little impact on the housing market but generate substantial fees for the mortgage-lending industry.
And refis can boost consumer spending when they lower the mortgage payments to leave more money for other stuff, or provide cash that borrowers can spend on remodeling projects, etc.
Some of the cash-out refi demand has shifted to Home Equity Lines of Credit. Amid higher interest rates, HELOCs may be the less expensive and more flexible option for many homeowners that want to get some cash out of their home, and HELOC balances have surged. So consumers are still taking equity out of their homes, but via HELOCs rather than cash-out refis:
HELOC balances spiked by 11.6% year-over-year in Q2, and by 45% since the low point in Q1 2021, to $459 billion. These are actual balances drawn on HELOCs and do not include the unused portion of those lines of credit.
The problem with the housing market, why it has frozen, is home prices that exploded by 50% or more in many markets in a two-year time span, which has triggered demand destruction.
Home prices exploded because, among other reasons, the Fed repressed mortgage rates below 3% with trillions of dollars of purchases of Treasury securities and mortgage-backed securities. This recklessness started in 2008 and went completely out of control in 2020-2021, leading to a massive home price explosion and the worst inflation in 40 years.
Before 2008, 7.5% mortgages were considered normal to low. But as a sign of things to come, the Greenspan Fed pushed its policy rates down too far, for too long, as a result of the 2001 recession, dragging mortgage rates below 6% by early 2003, at the time the lowest in Freddie Mac’s data going back to 1971, and inflation resurged, and home prices soared, and everyone went nuts amid FOMO, including the mortgage lending sector, leading to garbage mortgages at overinflated home prices, leading to the housing bust and mortgage crisis that then morphed into the Financial Crisis. Low mortgage rates are a scourge.
The pandemic iteration of too-low mortgage rates – now taxpayers are backing most of those mortgages, not banks – has not only triggered the home price explosion that annihilated affordability but has also caused homeowners’ insurance, property taxes, HOA fees, and other expenses to surge with home prices, further crushing affordability.
This chart, with data from Freddie Mac, is through Thursday last week, and does not yet include the most recent increases in mortgage rates. The new data will be released tomorrow:
In case you missed it: Homeowners Are Clinging to their Below-4% Mortgages for Dear Life as Mortgage Rates Went over 7%
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Wonder how many sellers in SoCal are thinking this “high” mortgage rates will pass soon and start pulling their house off the market hoping for better time right around the corner…..aggressive price cut they are not doing that’s for sure..
It’s like watching a slow motion car crash.
Considering that energy inflation is likely to accelerate for at least the next 12 months, RE construction costs and maintenance costs are likely is rise, perhaps dramatically!
“the Greenspan Fed pushed its policy rates down too far, for too long, as a result of the 2001 recession, dragging mortgage rates below 6% by early 2003, at the time the lowest in Freddie Mac’s data going back to 1971, and inflation resurged, and home prices soared, and everyone went nuts amid FOMO, including the mortgage lending sector, leading to garbage mortgages at overinflated home prices, leading to the housing bust and mortgage crisis that then morphed into the Financial Crisis….”
“The pandemic iteration of too-low mortgage rates – now taxpayers are backing most of those mortgages, not banks – has not only triggered the home price explosion that annihilated affordability but has also caused homeowners’ insurance, property taxes, HOA fees, and other expenses to surge with home prices, further crushing affordability.”
Can we say, as an economic rule, that if real interest rates are held too low by a government, we have an increased risk of asset price bubbles?
And if we accept the above as generally true, and we accept that asset price bubbles can be causes of recessions on their own, then it makes less and less sense to cut rates for years at a time in order to stimulate an economy out of recession.
Just as doctors have medicines that can only be taken for a fixed amount of time before problems occur, central bankers can only keep their overnight rates below the neutral rate for so long, before the toxic effect start to pile up. Then they can only raise rates at the risk of causing the recession they were trying to prevent.
The root problem is, central bankers and their monetary policy are forced into a compromise by the government’s fiscal policy. Congress has an interest in borrowing as much money as possible to dole out tax cuts, pork, and increasing benefits to their campaign donors. But even if central bankers try to stay in their own lane and only look at the evidence related to inflation and employment, they are still constrained by the growth of the US debt. If central bankers raise rates in a highly indebted country, then the government has to pay a lot more in interest, reducing its credit metrics, requiring painful cuts, and draining some larger percentage of GDP away from productive uses and toward debt financing.
Thus any effort by central banks to control inflation runs the risk of causing a recession or causing a debt spiral, and thus we have this situation in the U.S. where the Fed has not hit its inflation target for over 5 years because they have had to be too cautious.
This is mostly the fault of fiscal policy by our elected representatives. They are the ones who put the central bankers in a bind, and imposed a “third mandate” of “try to keep the country out of a debt spiral despite our ever-increasing debt”. As the debt/GDP goes higher and higher, central bankers steadily lose the option to do something about inflation. A popular compromise by central bankers has been to suppress rates, allow price bubbles to inflate, and accept above-target inflation for years at a time.