Mortgage Demand Edges Higher as 30-Year Rate Falls to a Three-Week Low

Lower borrowing costs gave mortgage demand a modest lift, although purchase volume remained well below last year’s pace.

Mortgage rates moved lower for a second straight week, offering some relief to brokers who have spent much of the year watching demand struggle under elevated borrowing costs.

Total mortgage applications increased 3.4% in the week ending October 23, as the 30-year fixed rate slipped to its lowest level in three weeks, according to the Mortgage Bankers Association’s Weekly Mortgage Applications Survey.

The back-to-back decline in rates reopened the conversation with some buyers, but both the purchase and refinance markets remain under pressure.

The MBA’s seasonally adjusted Market Composite Index, which measures total loan application volume, rose 3.4% from the previous week and 3% on an unadjusted basis.

The average contract rate for 30-year fixed mortgages with conforming loan balances, capped at $832,750, fell to 7.37% from 7.41%. Points rose slightly to 0.76 from 0.75 for 80% loan-to-value loans.

As major banks adjusted their expectations for Federal Reserve policy, even small drops in rates have been welcomed in a market still facing severe affordability challenges.

Joel Kan, CMB, vice president and deputy chief economist at the MBA in Washington, DC, said the decline offered limited but meaningful relief.

“The decline in rates gave borrowers some relief, with applications rebounding slightly, particularly conventional applications. Mortgage rates are still more than a percentage point higher than the same week last year and most homeowners still have rates much lower than prevailing market rates,” he said.

ARM usage reaches its highest level in more than a year

With fixed rates still elevated, more borrowers are turning to adjustable-rate mortgages.

The ARM share of total applications rose to 11.3%, its highest level in more than a year, as the average rate on 5/1 ARMs eased to 6.41% from 6.46%. That left ARMs nearly a full percentage point cheaper than 30-year fixed loans.

Because ARMs reset to market rates after the introductory period ends, brokers need to explain the trade-off clearly to rate-sensitive clients.

After mortgage rates fell from a nine-month high earlier in the year before climbing back, ARM demand has been building steadily.

Jumbo 30-year loans averaged 7.28%, while FHA-backed mortgages averaged 7.12%.

Purchase demand remains far below year-ago levels

Purchase applications rose 4% on a seasonally adjusted basis, but they were still 18% below the same week a year earlier.

Data from the Federal Housing Finance Agency’s National Mortgage Database show that about half of all outstanding mortgage holders have rates below 4%, giving most of them little incentive to sell or refinance at current levels.

Refinance applications gained 3% from the prior week but remained 61% lower than a year ago. The refinance share of total applications edged down to 38.9% from 39.0%.

“While purchase applications increased over the week, they were 18 percent behind last year’s pace as many homebuyers have put their purchase plans on hold,” Kan added.

“Similarly, refinance applications were down more than 60 percent from a year ago, as most borrowers have little to gain from refinancing.”

Attention will now turn to any remarks from Fed Chair Kevin Warsh on the monetary policy outlook, as the central bank is not broadly expected to announce a rate change at its next meeting.