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Higher Interest Rates Responsible For Lower Mortgage Volume

Written by Than Merrill

Experts professed that interest rates would not remain low forever. In fact, forecasts appear to be coming true, as interest rates are increasing in conjunction with the expansion of the economy. While still relatively low, mortgage interest rates have exceeded their previous high for the year. Of particular interest, however, is the direction mortgage volume went after news of the interest rate hike broke. Nearly three-quarters of the way through February, loan applications plummeted more than 13 percent over the course of a week. In spite of the recent decline, mortgage volume is still 14 percent higher than it was it this time last year.

At the onset of February, interest rates proceeded to increase for two consecutive weeks. Experts have already suggested that the rate hike is a direct result of the most recent employment report, which was better than expected. The encouraging jobs report appears to be the reason interest rates on 30-year fixed-rate mortgages went from 3.84 percent to 3.93 percent in the matter of a week. In addition to impacting mortgage volume, the rate increase reduced the amount of refinance applications. Applications to refinance fell 16 percent in the face of increased rates.

“Refinance volume fell particularly for larger loans, as evidenced by the decline of almost $25,000 in the average loan size for a refinance loan,” said Mike Fratantoni, the MBA’s chief economist.

In light of the rate increase, mortgage applications to purchase a home declined 7 percent. The total number of applications is higher than they were at this time last year, but just slightly. The sudden drop is surprising, considering recent moves made by the Federal Housing Administration (FHA). No more than three weeks ago, government officials announced that they would be lowering premiums on low down payment loans. The move was expected to increase buyer activity, but appears to have stalled in the face of higher interest rates.

“FHA volume continued to be stronger than the market as a whole, but also showed a decline. FHA purchase volume was down 5 percent for the week, and FHA refinance volume was down by 8 percent. By comparison, conventional purchase and refinance volumes were down 7 and 17 percent, respectively,” Fratantoni said.

Prior to interest rates reaching 3.93 percent, loan volume was spiking. The FHA’s plan to lower mortgage premiums was generating more activity. Applications for government-backed loans increased significantly in the face of lower insurance premiums. With the move, potential buyers are now awarded the opportunity of putting down as little as 3.5 percent.

The recent increase in mortgage rates really points to one thing: buyer sensitivity to small shifts in the market. The increase wasn’t all that significant, as rates are still historically low. In fact, anything below 4 percent is considered very low. At the onset of the economic downturn, just 8 short years ago, interest rates were more than 6 percent. And before that, at the turn of the century, interest rates were over 8 percent. All things considered, rates are still in favor of buyers. While the change in interest rates did prevent some buyers from purchasing, the decline in applications is also due, in part, to tight inventory levels.

Prospective buyers were not the only ones impacted by the recent increase in mortgage rates. Homebuilders, Realtors and real estate investors were all hoping to finish February on a strong note, as President’s Day usually represents the unofficial start of the popular spring buyer season. However, the holiday weekend failed to live up to expectations. Buyer traffic was lacking to say the least. While it is easy to blame the lack of purchases on frigid temperatures across the country, many equate the slow February to simple fundamentals.

“It’s the price point, not the temperature, that is chilling builders,” said Nela Richardson, chief economist for Redfin.