Housing Update as Mortgage Rates Fall, Applications Rise

Applications for home loans jumped recently as mortgage rates fell to their lowest in two months.

It comes on the back of cooling inflation and other economic data giving confidence to the view that the Federal Reserve is done with interest rate hikes, a development that analysts expect will reduce pressure on the housing market.

Mortgage applications rose 3 percent for the week ending November 17, their highest level in six weeks, according to data from the Mortgage Bankers Association (MBA). The average loan size on a house purchase application also fell to $403,600, the lowest since January 2023, evidence that first-time home buyers are increasing, MBA said.

The increase in mortgage applications comes at a time when rates have declined to 7.41 percent, lenders said.

"U.S. bond yields continued to move lower as incoming data signaled a softer economy and more signs of cooling inflation. Most mortgage rates in our survey decreased, with the 30-year fixed mortgage rate decreasing to 7.41 percent, the lowest rate in two months," Joel Kan, MBA's deputy chief economist, said in a statement on Wednesday. "Mortgage applications increased to their highest level in six weeks, but remain at very low levels."

Freddie Mac also added to the evidence of a softening of rates which at one point hit 8 percent, the highest level since the turn of the century. The 30-year fixed-rate mortgage, according to Freddie Mac, averaged 7.29 percent this week, albeit with an adjustment for a shortened week due to the Thanksgiving holiday.

"Mortgage rates continued to decrease heading into the Thanksgiving holiday," Sam Khater, Freddie Mac's chief economist, said in a statement. "In recent weeks, rates have dropped by half a percent, but potential homebuyers continue to hold out for lower rates and more inventory. This dynamic is reflected in the latest data showing that existing home sales have fallen to a thirteen-year low."

In October, previously owned home prices jumped 3.4 percent to a median amount of around $392,000, the fourth consecutive annual jump in prices, the National Association of Realtors said this week, as sales dropped by more than 4 percent.

Analysts say that sellers are unwilling to relinquish lower mortgages they acquired when rates were between 2 to 3 percent prior to the current cycle and enter a market where they may need to pay upwards of 7 percent for a home loan. This dynamic has frozen the previously owned homes market, especially.

One segment experiencing some activity is the new-homes market, according to Joe Seydl, senior markets economist at JP Morgan. Prices were down 14 percent in October for new homes compared to last year, he told Newsweek earlier Wednesday.

This tracks with recent data from September, when new-home sales shot up more than 12 percent from the previous month and increased 34 percent compared to the same time last year, as builders offered incentives for buyers to close deals.

The Federal Reserve's rate hikes since March 2022 worked to bring down historic levels of inflation that at one point had skyrocketed to a four-decade high, which experts say is the most aggressive increase in rates since the 1980s and helped push up borrowing costs for things such as cars, business investments and houses.

But inflation has slowed recently to 3.2 percent in October with the labor market also cooling, dynamics that have some analysts expecting the Fed to pause their rate hikes for the foreseeable future. That anticipated development could help unlock the housing market as well.

Seydl told Newsweek that if the economy avoids a recession, it could spark a decline in mortgage rates and make homes affordable for Americans again.

"If we assume mortgage rates fall by 1 percentage point, it would actually speed up the timeline to achieve affordability in America. It would reduce the timeline from three and a half years down to two years," Seydl said.

Update 11/22/23, 6:25 p.m. ET: This article was updated to include more context.