Mortgage activity falls as affordability concerns take a toll

Mortgage volumes decreased for both purchases and refinances last week despite falling interest rates, as lenders face an ongoing decline in demand driven by affordability concerns.

The Mortgage Bankers Association Market Composite Index, a measure of weekly application activity among association members, fell a seasonally adjusted 5.4% for the weekly period ending July 1. The data included an adjustment for early closings on July 1.

“Rates are still significantly higher than they were a year ago, which is why applications for

home purchases and refinances remain depressed,” said Joel Kan, MBA associate vice president of economic and industry forecasting, in a press release.

The Refinance Index dropped 8% week over week with volumes 78% below their level from one year ago. The share of refinance applications relative to total volume also decreased to 29.6% from 30.3% the previous week. At the same point in 2021 — when rates were more than 2 percentage points lower — refinances were regularly making up over 60% of loan volume compared to current activity.

In addition to suppressing refinance demand, the recent spike in interest rates has also discouraged a growing number of buyers, as homeownership suddenly becomes elusive for many. The Purchase Index fell a seasonally adjusted 4% from a week earlier. Compared to the same seven-day time frame last year, purchases are now approximately 8% lower.

“Purchase activity is hamstrung by ongoing affordability challenges and low inventory,” Kan said.

For the second week in a row, the average purchase-loan size also decreased, as market-price trends started showing signs of turning away from sellers. In the first quarter this year, average purchase amounts on new applications set several weekly records, peaking at $460,000 in March. But last week, the mean amount fell another 2% to $405,200 from $413,500 seven days earlier. 

Average refinance amounts picked up, though, by 3.6% to $283,200 from $273,300. The average loan size for all applications came out to $369,100, a drop of 0.5% from $371,000 seven days earlier. 

The total dollar volume of refinance applications also inched up 0.3% from the previous week, which was shortened by the Juneteenth holiday, according to Fannie Mae’s Refinance Application-Level Index. The index, which compiles refinancing data from the government-sponsored enterprise’s underwriting platform, reports dollar volume down by 72% year over year.

Meanwhile, the share of adjustable-rate mortgages measured by the MBA decreased to 9.5% of volume after making up 10.1% of volume the prior week. 

The share of government-backed activity remained relatively flat compared with the previous period, with Federal Housing Administration-backed loans accounting for 12% or all mortgages, the same as the prior week. Department of Veterans Affairs-sponsored loans made up 11.1% of the total pool of applications, down from 11.2%, while the share of mortgages coming through the U.S. Department of Agriculture remained unchanged at 0.6% week over week. Government activity overall decreased by a little more than 6% on a weekly basis.

The slowdown in activity during the pre-holiday week occurred even as interest rates among MBA lenders took a drop. “Mortgage rates decreased for the second week in a row, as growing concerns over an economic slowdown and increased recessionary risks kept Treasury yields lower,” Kan said.

The contract fixed-interest rate average for 30-year conforming loans with balances of $647,200 or below slid 10 basis points to 5.74% from 5.84% the prior week.

The 30-year contract fixed rate for jumbo mortgages above the conforming balance also decreased, falling to an average of 5.28% from 5.42% seven days earlier.

The 30-year contract fixed rate for mortgages backed by the FHA dropped by a smaller margin to 5.6% from 5.62% the previous week. 

The 15-year fixed-rate mortgage average declined 10 basis points to fall back below 5%, averaging 4.96% compared to 5.06% a week earlier. 

The contract interest rate for 5/1 adjustable-rate mortgages edged down by 2 basis points to an average of 4.62% after coming in at 4.64% the prior week.