Mortgage Demand Declines As Interest Rates Drop: What You Need To Know

Last week, the mortgage industry faced a steep drop in demand, despite the continual decrease in interest rates.

What Happened: According to Mortgage Bankers Association's adjusted index data issued Wednesday, total mortgage application volume fell by 9% compared to the previous week.

Despite a decrease in the average contract interest rate for 30-year fixed-rate mortgages, home refinance applications were down 7% for the week, with an 80% decrease compared to the same week a year ago.

See Also: Homebuyers Flock To Lower Interest Rates - MBA Survey

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) decreased to 6.19% from 6.20%.

The refinance share of mortgage activity decreased to 31.2% of total applications from 31.9% the previous week.

The low number of borrowers who can benefit from a refinance at current rates has resulted in declining demand.

Additionally, mortgage applications to purchase a home fell 10% for the week and 41% lower than the same period last year. The current low supply of homes for sale and declining home prices may be contributing to the drop in mortgage demand.

However, economists like Joel Kan predict that as the spring homebuying season approaches, purchase activity is expected to pick up with the help of moderating home-price growth and lower rates. This will allow some buyers to regain purchasing power, the economist said.

“Mortgage rates declined for the fourth straight week and have now fallen almost 40 basis points over the past month,” Kan said Wednesday. “Treasury yields were higher on average last week, while mortgage rates decreased, which was a sign of a narrowing spread between the two.”

Kan continued, “The spread between mortgage rates and the 10-year Treasury has been abnormally wide since early 2022. Further narrowing of that spread is expected to put downward pressure on mortgage rates in the coming months.”

The mortgage industry will closely watching commentary from the Federal Reserve's chairman Jerome Powell on Wednesday, as well as the monthly employment report on Friday, both of which could significantly impact mortgage rates and demand.

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