Housing Market Continues To Slow As Mortgage Applications Decrease

Mortgage applications declined 5.2% for the week ending May 31, with adjustments accounting for the Memorial Day holiday, signaling a continued cooling in the housing market.

Amid a backdrop of high mortgage rates, which saw the typical 30-year fixed rate rise to 7.07%, the market composite index, a measure of mortgage loan application volume, fell by 16% on an unadjusted basis from the previous week, according to data issued Wednesday by the Mortgage Bankers Association (MBA).

The decrease in refinancing and home purchase applications points to a growing buyer hesitance during a traditionally active spring period for housing transactions. The trend, noted by MBA's Chief Economist Mike Fratantoni, reflects a broader hesitation in the market due to climbing interest rates and ongoing economic uncertainty. 

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"Mortgage rates moved slightly higher last week, with the 30-year conforming rate reaching 7.07% — its highest level since early May — despite incoming data indicating somewhat slower economic growth," Fratantoni said in the MBA's report. "After adjusting for the Memorial Day holiday, both purchase and refinance application volumes were down, with purchase activity specifically 13% below last year's level."

The segmented responses in the MBA's data uncovered a few nuanced trends.

The refinance index, which gauges the volume of applications to refinance existing home loans, dropped by 7% from the previous week yet was 5% higher than the same week a year earlier. That slight year-over-year uptick suggests some homeowners still find opportunities to benefit from refinancing despite the overall application downturn.

Similarly, the seasonally adjusted purchase index, which reflects the number of applications for buying homes, fell by 4% week over week and by 13% more steeply than in the same period last year. 

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In terms of loan types, there was also a shift in preference.

Applications for adjustable-rate mortgages (ARMs) saw a relative increase, comprising 6.7% of total mortgage activity, up from 6.5% the previous week. That shift might indicate some buyers are seeking lower initial rates amidst climbing long-term mortgage costs.

On the other hand, the Federal Housing Administration (FHA) loans, which first-time buyers typically favor due to lower down payment requirements, constituted 13.2% of all applications, up from 12.7% a week earlier.

The Veterans Affairs (VA) loans, an indicator of first-time homebuyer activity, rose modestly to 12.1% of total applications from 12% the week prior, reflecting a continued reliance on government-backed programs.

"Government purchase volume was down less, helped by growth in VA applications," Fratantoni said. "The market is relying on first-time homebuyer demand, and many first-time buyers do use government lending programs."

Additionally, the geographical data hints at varying regional dynamics.

Regions with lower housing prices historically saw a smaller drop in application volumes, suggesting that affordability continues to drive market participation.

On affordability, while the price per square foot of homes has risen 50% since 2019, the share of homes in the ‘affordable' range of $200,000 to $350,000 has been increasing, according to a report issued by Realtor.com, which is giving first-time homebuyers some optionality.

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