Mortgage demand drops as interest rates rise, economy remains resilient

After reaching their highest level since July 2022, mortgage applications have declined for two straight weeks, counteracting some recent positive signs for a still-sputtering housing industry.

According to weekly data released Wednesday by the Mortgage Bankers Association (MBA), applications shrank 5.1% on a seasonally adjusted basis during the week ending Oct. 4. This included a 9% weekly decline in refinance applications and a 0.1% decline in purchase loan demand.

Compared to same week in 2023, however, purchase applications were up 8% and refi applications were up 159%.

“In the wake of stronger economic data last week, including the September jobs report, mortgage rates moved higher, with the 30-year fixed rate rising to 6.36 percent — the highest since August,” Mike Fratantoni, MBA’s senior vice president and chief economist, said in a statement. “Conventional loan refinances, which tend to have larger balances than government loans and hence are more responsive for a given change in mortgage rates, fell to a greater extent over the week.”

Refis have become more prevalent of late as interest rates have dropped enough from the recent peaks to put more borrowers in the money. But the refi share of mortgage activity dropped last week by 250 basis points (bps) and accounted for 52.4% of new applications.

In reference to the purchase market, Fratantoni observed that a couple key factors continue to play a role in consumer demand.

“As we have highlighted before, the decision to buy a home is impacted by many factors, not just the level of mortgage rates,“ he said. “The largest constraint for many prospective homebuyers over the past year had been the lack of inventory. Now, there are more homes available in many markets across the country, and with mortgage rates still low compared to recent history, at least some potential homebuyers are moving ahead.”

MBA data showed that government lending continues to represent a steady share of the mortgage market. For the week ending Oct. 4, Federal Housing Administration (FHA) loans decreased by 40 bps and represented 16.2% of all applications, while U.S. Department of Veterans Affairs (VA) loans rose by 150 bps to account for 16.9% of applications.

The average contract interest rate for 30-year fixed-rate loans with conforming balances ($766,550 or less) jumped from 6.14% to 6.36% during the week. Lender points, including origination fees, increased slightly to an average of 0.62 for mortgages with 80% loan-to-value (LTV) ratios.

Interest rates for jumbo loans (balances of more than $766,550) moved 12 bps higher during the week, averaging 6.64%. Lender points averaged 0.5, up 14 bps, on 80% LTV loans.

Adjustable-rate mortgages (ARMs) increased to 5.9% of all applications.

The MBA’s survey covers more than 75% of all U.S. retail residential mortgage applications across a variety of independent mortgage banks, commercial banks and thrifts. Its weekly application index is benchmarked to 100 in March 1990.