It’s a simple economic formula: the more something costs, the fewer people might be inclined to purchase it. Demand levels tend to decrease, especially at times when a product or service goes through a rate hike, as new, higher costs simply price out many that might have been interested otherwise. Yet this isn’t always the case. In fact, right now, research into the world of mortgage financing has revealed that while mortgage rates are much higher than they have been in years, the volume of individuals applying for these mortgages has also been on the rise as well. So what gives?
The new data comes to us by way of the Mortgage Bankers Association (MBA), with its most recent Market Composite Index. The new report shows that, for the week ending April 21st, seasonally-adjusted mortgage application volume increased by 3.7 percent compared to the prior week. Meanwhile, before adjustment, the difference was even greater at 5 percent.
Meanwhile, the MBA’s Refinance index also increased by 2 percent over the previous week, though year-on-year statistics show that it was 51 percent lower than in 2022. Only 26.8 percent of mortgage applications were for refinance applications, down from 27.6 percent the week before, whereas 2022’s proportion of refinances was measured at 35 percent, showing that refinancing activity continues to slide downwards.
There’s even more of interest in the MBA report, especially when it comes to loan sizes. These declined slightly, with overall averages down around $5,000 to $384,600. Purchase loans went down as well by around $6,000 to a new average of $431,600. FHA and VA loans also declined, with the former dropping by one-tenth of a percentage point to 12.6 percent and the latter receding to 11.2 percent, a drop of half a percentage point. USDA loans, which accounted for only 0.4 percent of the total, were at their lowest of the year.
Most telling, though, is that average interest rates for 30-year fixed-rate mortgages went up during this period, even as volume increased as well. Rates rose from 6.43 percent to 6.55 percent. Likewise, FHA-backed 30-year fixes increased by 8 basis points to 6.41 percent. 15-year fixes, meanwhile, also saw their rates increase by 14 basis points to 6.04 percent. Adjustable rate mortgages bucked the trend, decreasing to 5.47 percent from 5.56 percent, which is likely why the number of ARM loans increased to 6.7 percent, up from 6.3 percent the week before.
So why, in this case, would the volume of mortgage applicants be increasing while rates are also going up? It stands to reason that higher rates mean fewer prospective lenders interested in paying heightened interest on those loans, but this isn’t always the case. In fact, it’s more likely that higher rates are partially in response to increased demand for loans in the first place. There’s more at play than just this, of course. Rates are higher right now than they have been in some time, primarily due to the results of inflation and how the US Federal Reserve has been raising the US base rate in an effort to slow down that inflation. Yet the bigger culprit is likely due to housing market conditions that are driving buyers to take out loans, even at less-than-desirable mortgage rates.
The truth is that market inventory is quite low at the moment and has been so for quite some time. This means there are fewer homes for sale, which drives up competition for these properties. Sellers can afford to charge higher prices for their homes, and while prices have declined slightly from the historic highs we were seeing prior to the Fed’s anti-inflation campaign, average home prices of more than $384,000 still necessitate moderately-sized mortgage loans from buyers in order to afford these properties. This is changing, slowly but surely, but there’s little momentum in these moves; housing inventory might be growing slightly as of late, but not enough to put a dent in demand.
The Fed has gone on record that they’re not quite done with adjustments to the US base rate, as inflation is still high above its target rate currently. This means that there could very well be more rate hikes on the horizon, and this will inevitably drive mortgage interest rates higher still, well past their current levels. Yet the good news is that the Federal Reserve has also indicated that any new rate increases are likely to be less steep than they have been in the recent past. The timeline for these same increases is also likely to be more relaxed as well, giving the markets more time to adjust and come to an equilibrium, resulting in less overall volatility.
It could very well be that savvy house hunters know that, even with interest rates being what they are, they’re likely to go up at least marginally sometime soon. This could very well prompt an increase in mortgage applications by those looking to get out ahead of any upcoming rate increases. Additionally, with inventory low, there may simply be little choice when it comes to paying for that new property. In such situations, accepting a slight increase in mortgage rates now could pay off well against a date in the immediate future when they might be even higher.