Mortgage applications reached their lowest level in 22 years last week, according to the Mortgage Bankers Association (MBA).
The data adds weight to the view that the scorching hot housing market may be starting to cool. Mortgage applications were down for both home purchases and refinances, but the demand for refinancing was hit much harder—a drop of 75% from a year ago versus 21% for purchases.
With mortgage rates up to nearly 5.5% from around 3% last year, most home owners are paying a rate that’s lower than the current market rate, sapping the demand to refinance.
“The 30-year fixed rate increased to 5.4 percent after three consecutive declines. While rates were still lower than they were four weeks ago, they remain high enough to still suppress refinance activity. Only government refinances saw a slight increase last week,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting.
Meanwhile, record growth in home prices—which were up more than 20% nationwide in March—along with higher rates, have severely reduced affordability for potential homebuyers.
Tough Market For First-Time Buyers
“The purchase market has suffered from persistently low housing inventory and the jump in mortgage rates over the past months,” he continued. “These worsening affordability challenges have been particularly hard on prospective first-time buyers.”
The latest data on mortgage rates comes on the heels of recent data on new and existing home sales, which told a similar story: The housing market is slowing, albeit from a blistering pace.
That bodes poorly for homebuilder ETFs like the iShares US Home Construction ETF (ITB) and the SPDR S&P Homebuilders ETF (XHB), both down around 27% year –to date, though arguably, much of the slowdown in the market has already been priced into the stocks in the funds.
Analysts at Bank of America believe that despite a near-term slowdown, the housing market will be supported by strong long-term fundamentals.
“[We believe] that higher rates and lower affordability will lead to a decline in existing-home sales in 2022 versus 2021, with the pace slowing further as the year progresses,” the analysts explained. “But with supply of existing homes at just two months [the current sales rate], and demographics driving demand, the economists forecast another 15% increase in home-price appreciation this year.”
“We expect more strength in starts, and the economics team believes demand will be underpinned by the historic need for more housing,” they concluded.
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