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published : 2023-09-06

Mortgage Demand Plummets as High Rates Squeeze Buyers

High Mortgage Rates Rapidly Cooling Housing Demand

A couple of first-time homebuyers reviewing their mortgage options with a real estate agent in a cozy living room taken with a Canon EOS 5D Mark IV.

For many first-time homebuyers, the American dream is being delayed due to high mortgage rates and home prices.

According to the Mortgage Bankers Association (MBA), the key measure of home-purchase applications has tumbled to a nearly three-decade low.

The MBA's index of mortgage applications fell 2.9% last week, reaching the lowest level since 1996.

Both purchase and refinance applications declined, with the purchase index hitting a 28-year low.

Joel Kan, MBA's deputy chief economist, revealed that despite a drop in mortgage rates, applications have still hit their lowest point since December 1996.

Prospective buyers are remaining on the sidelines due to low housing inventory and elevated mortgage rates.

The average rate on the popular 30-year loan saw a slight improvement, sliding to 7.21% from 7.31% the previous week.

A group of prospective buyers visiting an open house and discussing the impact of high mortgage rates on their purchasing decision taken with a Nikon D850.

However, mortgage rates are still approximately one full percentage point higher than a year ago, which is causing a significant impact on housing demand.

Last week, applications for a mortgage to purchase a home tumbled 2%, while application volume is down 28% compared to the same period last year.

Refinancing applications also continued to fall, dropping 5% and decreasing by 30% compared to last year.

The interest rate-sensitive housing market has cooled rapidly as a result of the Federal Reserve's aggressive tightening campaign.

The benchmark federal funds rate has been raised 11 consecutive times as policymakers aim to control inflation and slow the economy.

Higher mortgage rates not only dampen consumer demand but also limit inventory.

Sellers who secured low mortgage rates before the pandemic are now reluctant to sell with rates near a two-decade high.

A close-up shot of a calculator and a document highlighting the rising interest rates and its effect on housing demand taken with a Sony Alpha a7 III.

This scarcity of available homes is leaving few options for eager buyers.

Realtor.com reports a significant decline in the total number of homes for sale, including homes under contract but not yet sold.

August saw a 9.2% decrease compared to the same period last year, and available home supply remains down 45% from pre-pandemic levels.

Danielle Hale, chief economist at Realtor.com, states that persistently low inventory, combined with record-high mortgage rates, is putting upward pressure on home prices.

This situation is amplifying affordability concerns and preventing some potential buyers from entering the market.