Despite the 10th rate hike by the Federal Reserve, last week raising the nominal interest rate yet again by 25 basis points to a range of 5.00% to 5.25%, mortgage applications increased 6.3% week-over-week, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending May 5, 2023.
The MBA’s Refinance Index increased 10% from the previous week, yet was 44% lower than the same week just one year ago. The seasonally adjusted Purchase Index increased 5% week-over-week. The unadjusted Purchase Index increased 5.3% compared to the previous week, and was 32% lower than the same week one year ago.
The refinance share of mortgage activity increased to 28% of total applications, up from 27.2% the previous week, while the adjustable-rate mortgage (ARM) share of app activity fell to 6.8% of total application activity.
“Mortgage applications responded positively to a drop in rates last week, as the Fed signaled a potential pause at the current level for the federal funds rate in anticipation of inflation slowing and tightening financial conditions that will slow economic and job growth. Mortgage rates for all surveyed loan types decreased over the week with the 30-year fixed rate at 6.48%,” said Joel Kan, MBA’s VP and Deputy Chief Economist. “Purchase applications increased 5% last week, but were still more than 30% below last year’s level. Lower rates from week to week have helped buyers in the market, but limited for-sale inventory remains a challenge for many homebuyers. Refinance activity jumped 10% to its highest levels since September 2022, although there is only a small pool of borrowers who can benefit from refinancing with rates at these levels.”
By loan type, the FHA share of total applications decreased slightly to 12.1%, down from 12.5% the week prior. The VA share of total applications increased to 12.9% from 11.3% the week prior. The USDA share of total applications decreased slightly to 0.4% from 0.5% the week prior.
“Spring is typically the busiest season for the residential housing market and, despite rates hovering in the mid-6% range, this year is no different," said Sam Khater, Freddie Mac’s Chief Economist. "Interested homebuyers are acclimating to the current rate environment, but the lack of inventory remains a primary obstacle to affordability.”
And as rates continue to linger in the mid-6% range, the spring housing market has been anything but typical to date, with a lack of inventory limiting choices for many, and many have been hamstrung by affordability concerns. A new report from Zillow finds that 52% of Gen Zers, and 57% of Millennials who don't currently own a home believe they'd need to win the lottery to afford one.
“The housing market is moving slower this spring. In a typical year, we would expect to see the number of homes for sale begin to increase more significantly from this point forward,” said Realtor.com Economist Jiayi Xu. “However, mortgage rates remain elevated, leading many sellers to report feeling ‘locked in’ by their current low mortgage rate and planning to wait until rates come down before selling, leading to fewer newly listed homes than a year ago.”
According to the MBA, consumer credit availability fell in April 2023, as reported by the MBA’s Mortgage Credit Availability Index (MCAI) which uses data from the ICE Mortgage Technology. The MCAI fell by 0.9% to 99.6 in April. A decline in the MCAI indicates that lending standards are tightening, while increases in the Index are indicative of loosening credit. The MCAI was benchmarked to 100 in March 2012.
Added Kan, “Even with high mortgage rates and reduced credit availability, the lack of for-sale inventory continues to be the biggest hurdle to more home purchase growth this year.”
The National Association of Realtors (NAR) reports that overall nationwide housing inventory in Q1 of 2023 averaged 1,630,000 listings at any given time, a 40% reduction from Q1 of 2019—a year before the onset of the COVID-19 pandemic.
"Due to the intense housing inventory shortage, multiple offers are returning, especially on affordable homes," notes NAR Chief Economist Lawrence Yun. "Price declines could be short-lived."