Mortgage Volume Gets Crushed by Spiking Interest Rates: What it Means

The boom is over. And there are broader effects.

By Wolf Richter for WOLF STREET.

Spiking mortgage rates multiply the effects of exploding home prices on mortgage payments, and it has taken layer after layer of homebuyers out of the market for the past four months. And we can see that.

Mortgage applications to purchase a home fell further this week and were down 17% from a year ago, hitting the lowest level since May 2020, according to the Mortgage Bankers Association’s weekly Purchase Index today. The index is down over 30% from peak-demand in late 2020 and early 2021, which was then followed by the historic price spikes last year.

“The drop in purchase applications was evident across all loan types,” the MBA’s report said. “Prospective homebuyers have pulled back this spring, as they continue to face limited options of homes for sale along with higher costs from increasing mortgage rates and prices. The recent decrease in purchase applications is an indication of potential weakness in home sales in the coming months.”

The culprit of the plunge in volume: The toxic mix of exploding home prices and spiking mortgage rates. The average interest rate for 30-year fixed rate mortgages with 20% down and conforming to Fannie Mae and Freddie Mac limits, jumped to 5.37%, the highest since August 2009, according to the Mortgage Bankers Association’s weekly measure today.

What this means for homebuyers, in dollars.

The mortgage on a home purchased a year ago at the median price (per National Association of Realtors) of $326,300, and financed with 20% down over 30 years, at the average rate at the time of 3.17%, came with a payment of 1,320 per month.

The mortgage on a home purchased today at the median price of $375,300, and financed with 20% down, at 5.37% comes with a payment of $1,990.

So today’s buyer, already strung out by rampant inflation in everything else, would have to come up with an extra $670 a month – that represents a 50% jump in mortgage payments – to buy the same house.

Now figure this with homes in the more expensive areas of the country where the median price, after the ridiculous spikes of the past two years, runs $500,000 or $1 million or more. Homebuyers are facing massively higher mortgage payments in those markets.

The combination of spiking home prices and spiking mortgage rates has the effect that layers and layers of buyers are leaving the market. And we’re starting to see that in the decline of mortgage applications.

The Fed has caused this ridiculous housing bubble with its interest rate repression, including the massive purchases of mortgage-backed securities and Treasury securities.

And the Fed is now trying to undo some of it by pushing up long-term interest rates. It’s the Fed’s way – too little, too late – of trying to tamp down on the housing bubble and on the risks that the housing bubble, which is leveraged to the hilt, poses for the financial system.

What it means for…