Mortgage rates reached their highest point since February last week, leading to a noticeable decline in overall homebuyer activity. The increase in borrowing costs is influencing potential buyers to explore riskier loan options that come with lower interest rates.

Service Data Overview

Data from the Mortgage Bankers Association (MBA) indicated that total mortgage application volume fell by 8.5% week-over-week, based on a seasonally adjusted index.

• The average contract interest rate for 30-year fixed-rate mortgages rose to 6.81%, up from 6.61%.
• Points decreased slightly to 0.62 from 0.63, which includes the origination fee for loans with a 20% down payment.

Buyer Activity and Market Inventory

While applications for purchasing homes declined by 5% compared to the previous week, they are still 13% higher than the same period last year. An interesting trend shows that active inventory has increased by 30% compared to last year, suggesting that the current annual comparisons should be more significant, given that a lack of inventory was a major factor in last year’s sluggish sales.

Economic Factors Influencing Buyers

Mike Fratantoni, senior vice president and chief economist at the MBA, highlighted that ongoing economic uncertainty and fluctuating rates are making potential buyers more apprehensive about proceeding with home purchases.

Increasing home prices are prompting some borrowers to focus on lowering their monthly payment obligations. Adjustable-rate mortgages (ARMs), which typically offer lower initial rates, are becoming more appealing despite their inherent risks due to rate adjustments.

“Given the jump in rates, more borrowers are opting for the lower initial rates that come with an ARM,” said Fratantoni. He noted a significant increase in the ARM share, which rose a full percentage point within just a week. The share of ARMs reached 9.6%, marking the highest level since November 2023, while nearly a quarter of the application volume was attributed to ARMs, particularly among those seeking larger loans.

Refinancing Trends

Refinancing applications also fell, dropping 12% from the previous week but still showing a considerable rise of 68% compared to the same week last year. Notably, rates were around 32 basis points higher last year.

Current Market Outlook

As the new week began, mortgage rates saw a slight decline amid calmer market conditions. However, experts remain cautious, indicating that the potential for future volatility in rates persists. Matthew Graham, chief operating officer at Mortgage News Daily, remarked, “Despite the friendly move and the relative calm, this still isn’t an environment where it makes sense to take anything for granted in terms of today’s rates being available beyond the present day.”