US mortgage rate nears 8%, further suppressing housing demand

The Mortgage Bankers Association’s (MBA) index of home-purchase applications decreases 2.2 per cent in the week ended Oct 20 to 127, the lowest level since 1995. PHOTO: BLOOMBERG

Published Wed, Oct 25, 2023 · 07:59 PM

A MEASURE of applications to finance home purchases slid to the lowest level since 1995 as mortgage rates approached 8 per cent, underscoring how mounting affordability challenges are crimping demand.

The Mortgage Bankers Association’s (MBA) index of home-purchase applications decreased 2.2 per cent in the week ended Oct 20 to 127, the lowest level since 1995. The contract rate on a 30-year fixed mortgage climbed for a seventh-straight week to 7.9 per cent, data out on Wednesday (Oct 25) showed.

Taking mortgage-related fees and compound interest into account, the effective rate surpassed 8 per cent for the first time in 23 years. The rate on a five-year adjustable mortgage climbed almost half a percentage point, the most since early June, to almost 7 per cent.

Ryan Marshall, chief executive officer at PulteGroup, said on Tuesday on the homebuilder’s earnings call that “demand has been a little choppier” in early October. “I’m sure for some buyers, higher rates have pushed affordability just that much further away, while others may be worried about their jobs.”

Mortgage rates tend to move in tandem with Treasury yields. With the 10-year yield rising above 5 per cent for the first time in 16 years earlier this week, home borrowing costs are at risk of climbing further in the weeks ahead.

Since the first week of April, the contract rate on a 30-year fixed mortgage has soared more than 1.5 percentage points.

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Existing home sales fall 2.0 per cent last month to a seasonally adjusted annual rate of 3.96 million units, the lowest level since October 2010.

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The office sector, battered by remote work and declining tenant demand for space, “continued to be the driving force behind growing distress, providing 93 per cent of the additional balance for the quarter”, according to MCSI Real Assets.

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Single-family housing starts, which account for the bulk of homebuilding, increases 3.2 per cent to a seasonally adjusted annual rate of 963,000 units in September.

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MBA overall index of applications to purchase or refinance a home slump 6.9 per cent in the week ended Oct 13 to 166.9.

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Though many prospective buyers have pursued new construction amid limited resale inventory, the recent surge in mortgage rates to the highest level in two decades risks a broader retrenchment.

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The contract rate on a 30-year fixed mortgage rises by 14 basis points to 7.67 per cent in the week ended Oct 6.

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Construction spending rises 0.5 per cent, according to The Commerce Department.

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Compared with a year earlier, pending home sales are down nearly 19 per cent on an unadjusted basis.

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Without a meaningful easing in borrowing costs, it’s not clear when affordability – currently at a record low – will improve for potential buyers. With inventory limited, prices remain high.

The overall index of applications, which includes purchases and refinancings, also fell to the lowest level since 1995. Refinancing activity picked up slightly.

The MBA survey, which has been conducted weekly since 1990, uses responses from mortgage bankers, commercial banks and thrifts. The data cover more than 75 per cent of all retail residential mortgage applications in the US. BLOOMBERG

US economy Housing Real estate Mortgages

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