Applications for home purchase mortgages have dropped to their lowest level since April 1995

Mortgage applications in the United States have taken a sharp plunge, reaching their lowest point in 28 years, primarily due to a surge in mortgage rates. The latest data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending August 18, 2023, reveals a significant decline in both overall mortgage applications and the purchase index.

The key takeaways from the data are as follows:

• Overall mortgage applications decreased by 4.2% compared to the previous week.
• The unadjusted purchase index, a measure of homebuyer interest, fell by 7%, marking a staggering 30% drop compared to the same period last year.
• The Refinance Index, reflecting refinancing activities, also fell by 3% from the previous week and was 35% lower than the same week in the prior year.

The primary driving force behind this decline is the substantial increase in mortgage rates. The average contract rate for a 30-year fixed-rate mortgage climbed by 15 basis points to 7.31%, marking the highest rate seen since December 2000. This rapid spike in rates has had a considerable impact on home loan applications.

Joel Kan, MBA’s Vice President and Deputy Chief Economist, explained, “Applications for home purchase mortgages dropped to their lowest level since April 1995, as homebuyers withdrew from the market due to the elevated rate environment and the erosion of purchasing power." He further noted that the limited housing supply, coupled with high prices in many markets, adds to the challenges that buyers are currently facing.

The drop in refinance activities is also a contributing factor to the tight housing supply. Homeowners, content with their existing low mortgage rates, are less inclined to refinance and move. This has led to a scarcity of available homes on the market, a trend that has been persistently observed. According to Lawrence Yun, chief economist at the National Association of Realtors, homeowners are enjoying substantial wealth gains from recent years, which has quelled concerns about potential home price declines.

The mortgage market's response to the recent surge in rates highlights the delicate balance between housing demand, affordability, and interest rates. As homeowners weigh the impact of higher rates on their purchasing power, the housing market's dynamics continue to shift in response.