Interest rates are rising slowly, causing big problems for mortgage lenders who mostly depend upon the refinance business. The industry has enjoyed steady business for years as interest rates continued to drop due to economic factors. But now, with rates as low as they can possible go and the finance industry pushing for raises, demand for refinancing has dried up.
The market moves are causing double digit percentage drops in applications from a year ago. The average interest rate for 30-year fixed-rate mortgages with loan balances of $647,200 or less increased to 3.72 percent from 3.64 percent. Points decreased to 0.43 from 0.45 (including the origination fee) for loans with a 20% down payment. One year ago, however, that rate was 77 basis points lower for the same week.
Because mortgage refinance applications are highly sensitive to daily rate moves, the industry felt a 13% drop in one week and a 53 percent drop year over year. According to the Mortgage Bankers Association’s seasonally adjusted index, rates moved higher for five straight weeks.
“After almost two years of lower rates, there are not many borrowers left who have an incentive to refinance,” wrote Joel Kan, an MBA economist. “Of those still in the market for a refinance, these higher rates are proving much less attractive to them.”
What about mortgage applications and the home-buying market?
Interestingly enough, mortgage loan applications also fell, though the number was small at just 2 percent (11 percent year over year for the same week). Mortgage rates are rising but home prices continue to balloon due to unprecedented demand. Many potential buyers feel like they cannot afford the home that they truly want, so they are waiting for a pull-back. Those buyers who are willing to brave the market tell horror story tales of blind bidding and multiple unseen offers.
At an open house last week in Maryland, three offers were already submitted before potential buyers even saw the house’s interior.
“We thought that because of the winter months that it would slack off a little bit; that prices would start to come back down to normal, but that’s not happening. It’s anguish, pain, and agony,” said Rondie Robinson, who was house hunting with his wife and daughter.
Another issue plaguing buyers is a lack of moderately-priced homes even on the market. The national median home price sits around $375,000. But demand is driving up prices so quickly that even modest homes are being tugged upwards into a different classification. The national average purchase loan size seemingly sets new records each month. Currently, it sits at $433,500, a new record.
As a result, buyers feel themselves between a rock and a hard place. Rising rates are colliding with rising prices. At this pace, the demand for both new mortgages and mortgage refinances will eventually dry up. It will happen when average Americans get priced out of the real estate market. At that point, though, the higher rates will scare away refinance investors. This will lead to a stagnation of money in the housing market in general.
