Homebuyers continue to hold back amid interest rate uncertainty
Mortgage applications fell for the second consecutive week as borrowers held out for potential rate cuts by the Federal Reserve.
Mortgage loan application volume fell 3.9% on a seasonally adjusted basis and 4% on an unadjusted basis from the previous week, according to data released by the Mortgage Bankers Association (MBA) for the week ending July 26.
The refinance index dropped 7%, while the seasonally adjusted purchase index fell 2%.
MBA chief economist Mike Fratantoni noted that the downward trend in mortgage applications was due to mortgage rates hovering a little below 7%.
“Mortgage rates were little changed last week, with the 30-year fixed mortgage rate unchanged at 6.82%,” Fratantoni said in the survey report. “Borrowers may be waiting for signs that mortgage rates will drift lower as the Federal Reserve begins to cut short-term rates. Purchase volume also dropped slightly because of ongoing affordability challenges.”
While the expectation of lower interest rates could potentially ease affordability constraints, Odeta Kushi, deputy chief economist at First American, said that a decline in rates may not significantly boost homeownership.
“The expectation of a Fed rate cut is already exerting downward pressure on mortgage rates,” said Kushi. “We expect a very modest easing in the affordability constraints holding back potential first-time buyers, as well as a little easing in the magnitude of the rate lock-in effect for existing homeowners.
“However, a decline in mortgage rates may boost demand more than supply. Traditionally, existing home inventory has made up the bulk of total inventory, and approximately 86% of existing homeowners have a rate below 6%. So, even if mortgages rates fall gradually through the remainder of this year, they are unlikely to fall enough to ‘unlock’ the majority of homeowners.”
Read more: How widespread is the housing market’s ‘lock-in’ effect?
Despite recent fluctuations, the refinance share of mortgage activity decreased to 38.2% of total applications from 39.7% the prior week. The adjustable-rate mortgage (ARM) share fell to 5.7%.
“In recent weeks, there have been some small bursts of refinance activity, particularly for FHA and VA loans. Last week, VA refi application volume dropped sharply, which drove the aggregate result,” Fratantoni said.
Government-backed loans saw mixed results. The FHA share of total applications increased to 14.2% from 13.4%, while the VA share decreased to 13.5% from 14.8%. The USDA share rose slightly to 0.5%.
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