Mortgage applications from home buyers are nearly half of what it was a year ago — that is the big Halloween spook for the housing industry this year. Total mortgage demand (including refinances) is the lowest that it has been in the last 25 years. The biggest reason for this is clear. The interest rate on mortgages has risen steadily for the past 10 weeks. Last week it crossed the 7% mark — a psychological as well as a financial barrier for borrowers. Let's study some of the real estate trends.

Total Mortgage Applications by the Numbers

Along with purchase mortgage applications slumping, refinancing applications are cratering as well. Refinance demand is down 86% compared to this time last year. In the entire country, there are fewer than 150,000 borrowers that would benefit from a refinance at today’s interest rates according to Black Knight Financial Services. That doesn’t even include the fee costs associated with a refinance.

Purchase applications dropped another 2% last week. Purchase applications are down 42% from last year at this time. Two subcategories did see slight increases in new applications. FHA loans that are preferred by low-income buyers and require PMI payments saw a slight increase. As did ARM loans, which is typical when interest rates are rising as it applies to existing home sales and home price growth.

Still, purchase prices are not tanking as sales volume dwindles in the marketplace. We must wait to see what will happen with purchase prices going forward but as of July, the S&P CoreLogic Case-Shiller Home Price Index shows the national home price average rose 15.6% year-on-year. The August numbers slowed slightly but were still well into double digits at 13%.

Mortgage Rates Above 7% for the First Time Since 2002

The average long-term U.S. mortgage interest rate went above 7% for the first time in more than two decades last week. This is the result of the Federal Reserve's aggressive rate hikes intended to tame an inflation rate not seen in some 40 years. Freddie Mac reported the average on the key 30-year rate jumped to 7.08% from 6.94% the previous week. The last time mortgage rates were this high was April 2002 when the economy was still recovering from the 9/11 terrorist attacks. Interest rates did not hit this high of a level even before the 2008 housing market collapse that triggered the Great Recession.

Only a year ago, rates on a 30-year mortgage averaged 3.14%. Although the Federal Reserve rate is not directly tied to mortgage rates, the Fed has raised its key benchmark lending rate five times this year. There have been three consecutive 0.75%-point increases which are viewed as very aggressive in the fight against inflation. The current Fed rate is a range of 3% to 3.25%, the highest level since 2008. At their last meeting in late September, they projected that by early next year they would raise their key rate to about 4.5%. That could mean another 1.25% increase in mortgage rates but often the forecast Fed rate increases are already built into current mortgage rates. But none of us know what will actually happen between now and the first of the year.

So with existing interest rates in the housing market what is a home buyer to do?