Lower weekly mortgage demand hints at a possible pullback by first-time homebuyers

Real Estate

Real estate agents arrive at a brokers tour showing a house for sale in San Rafael, California.

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With mortgage interest rates hovering near a record low, mortgage demand, especially from homebuyers, is now significantly higher than a year ago, but there are warning signs that first-time buyers may be struggling to stay in the market. 

Total mortgage application volume fell 0.8% last week from the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. 

Mortgage applications to purchase a home were 2% lower last week than the previous week but a strong 21% higher annually. Homebuyers are making up for lost time last spring and appear to have a new urgency to move due to the Covid-19 pandemic. Buyer demand for new construction is especially strong, as the supply of existing homes for sale continues to shrink.

Applications to refinance a home loan were basically flat, falling 0.4% for the week but were 121% higher than a year ago. Refinance demand has been riding high because mortgage rates keep falling. Even small rate moves open the field to more borrowers who can benefit and save much-needed cash on their monthly payments. 

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances of up to $510,400 remained unchanged at 3.20% with points and origination fees increasing to 0.37 from 0.35 for loans with a 20% down payment.

However, the average rate for FHA-backed 30-year fixed-rate mortgages jumped to 3.27% from 3.13%.

That led to much larger drops in applications for FHA loans to refinance and purchase a home. FHA loans are popular with first-time homebuyers because they offer lower down payments.

A pullback on FHA purchase demand could be a red flag in the housing recovery. These buyers made up a strong 35% of closed sales in June, according to the National Association of Realtors, but that was before the pandemic took another turn for the worse. Higher interest rates, as well as rising home prices, may be weighing on this cohort. 

“This trend, along with the fact that average loan sizes are increasing, indicate that prospective first-time buyers are being impacted more by the rising economic stress caused by the resurgence in Covid-19 cases, as well as the uncertainty on how the next round of government support will take shape,” said Mike Fratantoni, chief economist for the MBA. 

Mortgage rates moved slightly higher at the start of this week but could see a more dramatic move later in the week, after the Federal Reserve reports its latest stance on monetary policy on Wednesday afternoon. 

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