Demand for mortgages falls further, as interest rates shoot back up to July highs

A real estate agent shows an apartment to a potential buyer in Miami, Florida.

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After falling back earlier this month, mortgage rates began to rise sharply again to the highest level since mid-July. This caused the demand for mortgages to recede even further.

Total mortgage application volume fell 3.7% last week compared to the previous week, according to the Mortgage Bankers Association̵[ads1]7;s seasonally adjusted index. The volume was 63% lower than the same week a year ago.

The average contract rate for 30-year fixed-rate loans with conforming loan balances ($647,200 or less) increased to 5.80% from 5.65%, with points up to 0.71 from 0.68 (including the origination fee) for loans with 20% down . payment. This share was 3.11% a year ago.

“Mortgage and Treasury yields rose last week as Federal Reserve officials indicated that short-term interest rates would stay higher for longer. Mortgage rates have been volatile over the past month, bouncing between 5.4 percent and 5.8 percent,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting.

As a result, refinancing demand, which is highly sensitive to weekly interest rate movements, fell another 8% for the week and was 83% lower than the same week a year ago. The refinancing share of mortgage activity fell to 30.3% of total applications from approx. 66% a year ago.

Applications for mortgages to buy a home fell 2% for the week and were 23% lower than the same week a year ago.

“Purchase applications have declined in eight of the past nine weeks as demand continues to shrink due to higher prices and a weaker economic outlook,” Kan said. “However, rising inventory and lower home price growth could potentially bring some buyers back into the market later this year.”

House prices are still well above last year’s levels, but they fell 0.77% from June to July. It was the first monthly drop in nearly three years, according to Black Knight, a mortgage software, data and analytics firm.

While the drop may seem small, it is the biggest one-month decline in prices since January 2011. It is also the second-worst July performance dating back to 1991, behind the 0.9% drop in July 2010, during the Great the recession.

Given the recent volatility in mortgage rates, the spread between jumbo and conforming loan rates widened again. Jumbos, which previously had higher interest rates due to the size of the loans, are now 48 basis points lower than conforming loans. That spread exceeded 50 basis points in July. This is probably because jumbos are not backed by the government, which has a stricter risk tolerance, but are held on the bank balance sheet. The banks are desperate for mortgage business right now.

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