Purchase applications plunge to lowest level since 1995

Mortgage volumes declined for the second week in a row, with demand diminished by the highest interest rates in three months, the Mortgage Bankers Association said.

The MBA's Market Composite Index, a measure of weekly loan application volume based on surveys of association members, tumbled a seasonally adjusted 13.3% for the period ending Feb. 17. The fall represented a 57.2% decrease from year-ago levels. After starting the year with three consecutive increases, the index has come in lower in all but one of the last four surveys.

The latest acceleration of mortgage rates contributed to the rapid pullback, especially in the purchase market. The seasonally adjusted Purchase Index dropped 18.1% week over week, driving volumes down to their lowest level since 1995, according to Joel Kan, MBA's vice president and deputy chief economist.

"This time of the year is typically when purchase activity ramps up, but over the past two weeks, rates have increased significantly as financial markets digest data on inflation cooling at a slower pace than expected," he said in a press release. Compared to the same week in 2022, purchase applications decreased by 41.3%.

Reluctant sellers holding on to their low interest rates have helped keep prices elevated, suppressing buyer interest, but economists at the likes of online real estate brokerages Zillow and Redfin saw hints of business returning at the start of the year. That uptick appears to have subsided, though, with Redfin also reporting demand for home tours declining last week for the first time in a month. Interest rates threw a "wet blanket" on buyer sentiment, said Redfin's economics lead Chen Zhao.

"The housing market recovery will remain touch-and-go until we see inflation and the overall economy improve for a longer duration," she said. 

The MBA's Refinance Index, likewise, continued slowing, down from the prior week by a more muted 2%. But on a year-over-year basis, refinances landed 72% under their reading from a year ago. 

"Given that rates are over 2.5 percentage points higher than a year ago, we expect that refinance activity will remain depressed for some time," Kan said. 

But with a larger contraction in purchases, the refinance share relative to total activity inched upward to 32.5% from 32% the previous week. The slice of adjustable-rate mortgage activity, which typically sees a spike when interest rates increase, also grew to 7.6% from 6.9%. The ARM share has risen from a 2023 low of 6.5% in late January to its current mark in tandem with higher mortgage rates. 

Rate movements may also mean the spotlight will turn again to affordability concerns, with purchase loan sizes consistently expanding this year, indicating a skew toward more expensive properties, the MBA recently noted. 

"The increase in mortgage rates has put many home buyers back on the sidelines once again, especially first-time home buyers who are most sensitive to affordability challenges and the impact of higher rates," Kan said.

But after surging 11% since early January, average purchase-application amounts finally took a step back in last week's MBA survey, sliding back a fraction to $431,900 from $433,300. Average refinance sizes also shrank to $267,200, representing a 2.6% dip from $274,300 the prior week. The overall average across all applications amounted to $378,400, down 1% from $382,500 seven days earlier.

Federal Housing Administration-backed applications amounted to 12.1% of new mortgage activity compared to 12.6% a week earlier. The share of loans guaranteed by the Department of Veterans Affairs dropped to 12% from 12.6%, while applications coming through U.S. Department of Agriculture-sponsored programs garnered 0.6%, the same as in the previous survey.

Meanwhile, average mortgage rates tracked by the MBA jumped by double-digit basis points across the board, the association said. 

The contract average rate for the 30-year fixed mortgage with conforming balances of $726,200 or less leaped 23 basis points to 6.62% from 6.39% the prior week, hitting a mark last seen in November 2022. Points increased to 0.75 from 0.7 for 80% loan-to-value ratio loans. 

The 30-year jumbo fixed rate for loans with balances above the conforming amount averaged 6.44%, surging from 6.26%, with points increasing to 0.53 from 0.43.

The average contract interest rate for the 30-year FHA-backed mortgage climbed to 6.39% from 6.25% week over week. Points increased to 1.16 from 1.14.

The contract average for the 15-year fixed-rate mortgage increased 13 basis points to 5.98% from 5.85% the previous week, with points increasing to 0.93 from 0.81.

After registering the only decline a week ago, hybrid loan rates went back the other way. The 5/1 adjustable-rate mortgage average finished the week 13 basis points higher, rising to 5.66% from 5.53%. Points increased to 0.97 from 0.72 for 80% LTV ratio loans.