Mortgage Demand Collapses As Market Reacts To Rising Interest Rates

Mortgage demand has collapsed as interest rates continue their ascent amid the Federal Reserve's tightening of monetary conditions.

On Wednesday, the Mortgage Bankers Association (MBA) shared its weekly data on mortgage applications and found the total volume declined by 5% in the last week. However, the MBA found that the overall volume of applications fell by about 14% compared to the same time last year.

With rates climbing, refinancing has dropped off by about 8% since last week and was 68% lower than the same time one year ago.

Joel Kan, MBA's Associate Vice President of Economic and Industry Forecasting, suggested that the wider picture of tighter monetary policy is to blame for the cratering in demand for mortgages and refinancing.

“Ongoing concerns about rapid inflation and tighter US monetary policy continued to push Treasury yields higher, driving mortgage rates to their highest level in over a decade," Kan explained in an MBA press release.

Kan added that this situation has only exasperated the wider shortage of housing inventory, as well as affordability problems within the market.

“In a housing market facing affordability challenges and low inventory, higher rates are causing a pullback or delay in home purchase demand as well. Home purchase activity has been volatile in recent weeks and has yet to see the typical pick up for this time of the year,” he added.

Indeed, higher rates are coinciding with a continued sag in housing supply. On Tuesday, the U.S. Census Bureau reported that permits for new construction rose by 0.4% in March to an annual rate of 1.873 million, up from February’s revised 1.865 million. Despite this, homebuilders' confidence in the market has been on the downturn for the last four months, a factor likely to do with inflation pushing up construction costs.

Throughout last year, the U.S. housing market rebounded sharply from the downturn experienced in 2020 when the COVID-19 pandemic arrived and the supply of available homes lagged behind surging demand. Complicating the situation was a pre-existing labor shortage in the construction sector and supply chain issues with construction materials driving prices higher nationwide.

But with inflation continuing on its upward trajectory, the Fed has acted. Last month, the central bank launched a rate hike of a quarter of a percentage point for the first time in three years with more rate increases are expected in the coming months. Minutes from a recent meeting of Fed officials also suggest they will proceed with a larger rate hike at their next meeting in May.