Mortgage Demand is Dropping Despite Record-Breaking Interest Rates

News about record-breaking mortgage rates has dominated headlines in recent weeks, and for good reason. Rates are currently at near-record lows for conventional loans and are low across the board for most other types of mortgage loans. These low rates have ignited a flurry of refinances and home purchases, offering hope that the national housing market would be able to sustain the economic hit from the COVID-19 pandemic.

However, a recent dip in mortgage applications is leading to concerns that the housing recovery isn’t as strong as experts once predicted. According to this week’s data from the Mortgage Bankers Association’s seasonally adjusted index, the overall total mortgage loan application volume dipped 0.8% last week from the week prior, and demand was down 1% on an unadjusted basis week over week.

This new data from MBA also highlights concerns about first-time homebuyers in particular, who appear to be either tepid about entering the housing market at a time of nationwide economic turmoil — or flat-out unable to due to individual economic hardships and stress.

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What’s going on with mortgage applications?

One of the major contributing factors to the overall drop in applications was a decrease of nearly 18% in FHA refinance applications, according to the MBA report. This was likely due to a simultaneous hike in FHA interest rates, with rates increasing from 3.13% to 3.27% — a jump of 0.14% from week to week — and points increasing to 0.35 from 0.29 (including the origination fee) for 80% LTV loans.

“Mortgage rates remained near record lows for conventional loans last week, and refinances in the conventional sector continued to slightly increase. However, rates on FHA loans rose, leading to an almost 18 percent drop in FHA refinances,” said Mike Fratantoni, MBA’s Senior Vice President and Chief Economist.

But, while FHA refinances were down significantly, they weren’t the only culprit in the overall drop. Mortgage applications for home purchases also dropped 2% overall from the week prior.

Although the purchase application volume decreased for all types of loans, there was a notable drop in applications for FHA purchase loans in particular, with the FHA share of total applications decreasing to 9.6% from 10.8% the week prior.

This is concerning because FHA loans are a popular choice with first-time homebuyers due to the low down payment requirement and flexible credit score threshold for these types of federally-backed loans. The decrease in demand could signal that first-time homebuyers are either uncertain about entering the housing market during a time of economic turmoil or are unable to due to the economic stress from the new, sustained uptick in coronavirus cases.

Either way, the drop in demand is not a great sign for the housing market or the economy overall, considering that first-time FHA borrowers made up 35% of the total housing sales in June. Borrowers using FHA-backed loans also made up 20.4% of new home sales in the first quarter of 2020.

“Homebuyers stepped back slightly, and there was a larger drop in purchase application volume for FHA, VA, and USDA loans. This trend, along with the fact that average loan sizes are increasing, indicate that prospective first-time buyers are being impacted more by the rising economic stress caused by the resurgence in COVID-19 cases, as well as the uncertainty on how the next round of government support will take shape,” Fratantoni said.

Will this decline in mortgage demand continue?

While it’s tough to know whether we’ll see another drop in mortgage applications next week, a new report on the state of the U.S. economy could cause even more people to shy away from the housing market. The report, issued Thursday, showed that the coronavirus pandemic has triggered the sharpest economic contraction in modern American history.

The U.S. real gross domestic product (GDP) — which is the broadest measurement of the nation’s collective economic activity — decreased at an annual rate of 32.9% in the second quarter of 2020, according to the advance estimate released by the Bureau of Economic Analysis. In the first quarter of 2020, real GDP decreased just 5.0%, signaling that the bulk of the economic damage has occurred over recent months.

The decrease in real GDP reflects decreases in personal consumption expenditures, exports, private inventory investment, nonresidential fixed investment, residential fixed investment, and state and local government spending that were partly offset by an increase in federal government spending.

“The decline in second quarter GDP reflected the response to COVID-19, as ‘stay-at-home’ orders issued in March and April were partially lifted in some areas of the country in May and June, and government pandemic assistance payments were distributed to households and businesses,” according to the report. “This led to rapid shifts in activity, as businesses and schools continued remote work and consumers and businesses canceled, restricted, or redirected their spending.”

Not much has been done in recent weeks to help temper the damage, either. As of July 30, lawmakers were still at odds over a new stimulus package to help the millions of out-of-work Americans who are struggling to weather the coronavirus-damaged economy.

The federally-enhanced unemployment benefits that gave unemployed Americans an extra $600 a week as part of the CARES Act also ended this week, which will likely add to the concern for some homebuyers over the feasibility of affording a home purchase in such a rocky economy.

While the signs aren’t great, it’s not all bad news for the housing market. Mortgage applications are still up 21% higher annually over 2019, according to the Mortgage Bankers Association, and refinance applications are 121% higher than they were a year ago.

Whether the numbers will stay up year-over-year remains to be seen, but it’s pretty unlikely that the housing market can sustain that kind of pace over the long haul unless economic conditions markedly improve.

Is this the right time to take out a mortgage?

If you’ve been tossing around the idea of buying or refinancing a home, this could be the right time to make your move, both literally and figuratively. Mortgage rates can fluctuate with demand, but the rates are still extremely low overall, so even if they jump of 0.1% week over week, you could still save money with a refinance. It will depend on your current rate and loan terms, though.

If you’re planning to buy rather than refinance, this could be an ideal time to do so. Mortgage rates overall are very low, and the average 30-year fixed loan mortgage rate for the week ending with July 30 is currently at 2.99% with 0.8 discount points paid, according to Freddie Mac’s Weekly Survey. That’s down 0.02 percentage points from last week — and just 0.01 percentage point above the all-time low set July 16.

Mortgage rates rarely slide below 3% — and considering that the 30-year mortgage rate was 3.75% this time last year, a rate of 2.99% is awesome. Plus, the Fed’s July meeting kept the key federal funds rate at near 0%, which almost guarantees that mortgage rates will stay low for the time being.

As with anything, you’ll have to weigh your overall financial picture before making the leap on a new home purchase or refinance, but if your economic position has held steady thus far during the pandemic and looks like it will continue to do so, you could get a loan rate at a steal.

Angelica Leicht

Mortgage Researcher

Angelica Leicht is a writer and editor who specializes in everything mortgage-related for Her work has spanned topics that include lending product reviews, interest rate trends, racial biases in mortgage lending and the role of fintech in lending practices, and has appeared in publications such as Interest, The Simple Dollar, Bankrate, The Spruce, Houston Press and VeryWell, among others.