– Mortgage applications for homebuyers fell for the second week in a row due to rising rates.
– Requests to refinance mortgages were up 12 percent week over week but only 1 percent from a year ago.
– Mortgage rates on 30-year fixed-rate conforming mortgages have increased slightly from recent lows.
– Despite the increase, a record number of Americans expect mortgage rates to come down in the future.
– Purchase activity has been strong compared to the previous quarter, but weaker than a year ago due to low housing supply.
– The Federal Reserve is unlikely to cut interest rates in March, according to Fed Chairman Jerome Powell.
– Powell wants more evidence that inflation is moving sustainably down to 2 percent before considering rate cuts.
– Rates on jumbo mortgages that exceed conforming loan limits have increased, leading to concerns about regional banks.
– Powell does not expect a real estate crisis similar to the 2008 financial crisis but anticipates some smaller banks may close or merge due to challenges in the sector.
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Homebuyer demand for mortgages fell for the second week in a row last week as firming rates put a damper on the surge in mortgage applications seen in January, a weekly survey of lenders by the Mortgage Bankers Association (MBA) shows.
The MBA’s Weekly Mortgage Applications Survey showed applications for purchase loans fell by a seasonally adjusted 1 percent last week when compared to the week before and were down 19 percent from a year ago. Requests to refinance were up 12 percent week over week but only 1 percent from a year ago.
“Mortgage rates have stayed close to where they started the year, despite swings in Treasury yields because of slowing inflation offset by stronger than expected readings on the job market,” MBA Deputy Chief Economist Joel Kan said in a statement.
Mortgage rates no longer falling
At 6.68 percent Tuesday, rates on 30-year fixed-rate conforming mortgages were up 12 basis points from a recent low of 6.56 percent registered on Dec. 27, according to loan lock data collected by Optimal Blue.
That’s still a 1.15 percentage point drop from last year’s peak of 7.83 percent, seen on Oct. 25. However, a record number of Americans polled by Fannie Mae in January — many of whom have been priced out of markets where listings remain scarce — said they’re expecting mortgage rates to come down even more in the year ahead.
“Rates at these levels have not prompted much of a reaction in the refinance market, as most homeowners have mortgages with much lower rates,” Kan said. “Purchase activity has been strong to start 2024 compared to the final quarter of 2023. However, activity is still weaker than a year ago because of low housing supply.”
Applications for purchase mortgages picked up during the first three weeks of January after rates pulled back from 2023 highs. But with mortgage rates now slightly higher than they were at the end of the year, the MBA’s surveys show demand for purchase loans contracting during the weeks ending Jan. 26 and Feb. 2.
Bond market investors’ bets that the Federal Reserve would begin cutting rates in March had been helping bring rates down. But at the central bank’s first meeting of the year, Fed Chairman Jerome Powell warned that a March rate cut was unlikely, and Fed policymakers indicated they intend to continue “quantitative tightening” that’s trimmed $1.3 trillion from the Fed’s balance sheet.
A blowout jobs report released Feb. 2 seemed to validate the Fed’s cautious approach to fighting inflation, showing U.S. businesses and government agencies added close to twice as many jobs as expected in January.
(A survey by the National Federation of Independent Business (NFIB) that’s considered to be a leading indicator of future employment trends points to slower job growth in the second quarter of this year, economists at Pantheon Macroeconomics said Tuesday in a note to clients.)
In an interview with the CBS News program 60 Minutes that aired Sunday, Powell reiterated that while almost all 19 members of the Federal Open Market Committee expect to cut rates this year, the first cut isn’t likely to come until the middle of the year.
Inflation “has been falling steadily for 11 months,” 60 Minutes reporter Scott Pelley pointed out to Powell. “You’ve avoided a recession. Why not cut the rates now?”
Powell said that with the economy still on strong footing, “we feel like we can approach the question of when to begin to reduce interest rates carefully.”
The Fed wants to see “more evidence that inflation is moving sustainably down to 2 percent,” Powell said. “We have some confidence in that. Our confidence is rising. We just want some more confidence before we take that very important step of beginning to cut interest rates.”
At 7.29 percent, rates on jumbo mortgages that exceed Fannie Mae and Freddie Mac’s $766,550 conforming loan limit are up 73 basis points from a recent low of 6.56 percent registered by Optimal Blue on Dec. 29.
The growing “spread” between conforming and jumbo mortgage rates coincides with renewed worries that falling commercial real estate values could lead to problems for regional banks that have traditionally been a leading provider of jumbo loans.
Asked by 60 Minutes about the likelihood of real estate sparking a banking crisis on the magnitude of the 2008 financial crisis, Powell said he doesn’t think that’s likely.
“We’ve looked at the larger banks’ balance sheets, and it appears to be a manageable problem,” Powell said. “There are some smaller and regional banks that have concentrated exposures in these areas that are challenged. And, you know, we’re working with them.”
While he doesn’t see a repeat of the 2008 financial crisis, Powell does expect “there will be some banks that have to be closed or merged out of existence because of this. That’ll be smaller banks, I suspect, for the most part.”
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Property Chomp's Take:
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One of the biggest trends in the real estate market right now is the decrease in homebuyer demand for mortgages. According to the Mortgage Bankers Association's Weekly Mortgage Applications Survey, applications for purchase loans fell by 1 percent last week compared to the previous week. This decline can be attributed to the rising interest rates, which have put a damper on the surge in mortgage applications that was seen in January.
Despite the decrease in demand, there is still hope for the market. Mortgage rates have remained relatively stable since the beginning of the year, and many Americans are expecting rates to come down even further in the future. This optimism is fueled by the belief that low mortgage rates will make homeownership more affordable, especially in markets where listings are scarce.
However, it's important to note that while there has been a decline in demand for purchase loans, requests to refinance have actually increased. This is likely because most homeowners already have mortgages with lower rates, so the current rates are not enticing enough for them to refinance. On the other hand, those who are looking to purchase a home are facing challenges due to low housing supply.
The bond market has also played a role in the fluctuation of mortgage rates. Investors were betting that the Federal Reserve would begin cutting rates in March, which would have brought rates down further. However, at the central bank's first meeting of the year, Fed Chairman Jerome Powell indicated that a rate cut in March is unlikely. He also stated that the Fed intends to continue "quantitative tightening," which has reduced the Fed's balance sheet by $1.3 trillion.
Powell's cautious approach to fighting inflation is supported by a blowout jobs report released in February. The report showed that U.S. businesses and government agencies added close to twice as many jobs as expected in January. While this is good news for the economy, it also indicates that inflation may not be as big of a concern as previously thought.
Despite the increase in mortgage rates, there is still a demand for jumbo mortgages that exceed Fannie Mae and Freddie Mac's conforming loan limit. However, the growing spread between conforming and jumbo mortgage rates has raised concerns about falling commercial real estate values and the potential problems they could create for regional banks.
In an interview with CBS News, Powell addressed the possibility of a banking crisis similar to the one in 2008. He stated that while there are some smaller and regional banks that have concentrated exposures in challenged areas, the larger banks' balance sheets indicate that it's a manageable problem. Powell expects that there will be some banks that have to be closed or merged, but he believes that it will mostly be smaller banks.
In conclusion, the real estate market is experiencing a decline in homebuyer demand for mortgages due to rising interest rates. However, there is still hope for the market as mortgage rates have remained relatively stable and there is optimism that rates will come down in the future. Inman's upcoming events provide a platform for industry professionals to come together, share insights, and navigate the challenges of the market. So mark your calendars and join the industry's best at inman.com/events!