Mortgage interest rates rose to their highest level of the year, and mortgage volume reacted in the opposite direction. Loan applications fell 13.2 percent for the week that ended Friday, according to the Mortgage Bankers Association. Total volume is still 14 percent above where it was a year ago, when interest rates were considerably higher.
After hovering near record lows for much of January, interest rates moved up for the second straight week, following a better-than-expected January employment report. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 3.93 percent from 3.84 percent, with points increasing to 0.35 from 0.31 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans, according to the MBA. That increase had the biggest effect on refinance applications, which fell 16 percent week to week on a seasonally adjusted basis.
“Refinance volume fell particularly for larger loans, as evidenced by the decline of almost $25,000 in the average loan size for a refinance loan,” said Mike Fratantoni, the MBA’s chief economist.
Mortgage applications to purchase a home also reacted negatively, falling 7 percent for the week, although they are barely higher than a year ago. This, even after the Federal Housing Administration, the government mortgage insurer, lowered premiums on low down payment loans dramatically just three weeks ago. That made loans considerably cheaper for cash-strapped buyers.
“FHA volume continued to be stronger than the market as a whole, but also showed a decline. FHA purchase volume was down 5 percent for the week, and FHA refinance volume was down by 8 percent. By comparison, conventional purchase and refinance volumes were down 7 and 17 percent, respectively,” Fratantoni said.
FHA volume did spike as the new premiums went into effect, a big change from 2014 when low down payment loans fell to an 11-year low. Just 25 percent of buyers in 2014 using conventional or FHA loans put less than 3 percent down on their home purchases, according to RealtyTrac. That is down from 27 percent in 2013 and down from a peak of 46 percent in 2009, when the first-time homebuyer tax credit went into effect. First-time buyers are more likely to put less cash down on their home purchases.
It just shows how sensitive today’s buyers are to the slightest moves in rates. The 30-year fixed is still below 4 percent, historically very low, but home prices are still rising. Prices are not being driven as much by demand as they are by incredibly tight inventory.
Demand is unlikely to improve this week, not for refinances nor for purchases. Interest rates jumped again Tuesday, reacting quickly to a selloff in the bond market. Mortgage rates loosely follow the yield on the 10-year Treasury, which moved markedly higher. Investors fled the safe-haven bond trade, as fears about Greece and the euro zone abated.
“In terms of bad months following good months, February is the worst bounce since January 2009,” said Matthew Graham of Mortgage News Daily. “What had been 3.625 percent two weeks ago is now 3.875 percent.”
The nation’s home builders and Realtors had been hoping for a bounce over the President’s Day holiday weekend, the unofficial start of the spring housing season, but buyer traffic was weak. Builders blamed frigid temperatures and seemingly endless snowfall across much of the nation, but others pointed to simple fundamentals.
“It’s the price point, not the temperature, that is chilling builders,” said Nela Richardson, chief economist for Redfin.
Home builders are still focusing on higher-end homes, which will become more vulnerable as rates rise. They are also still building at below-average levels. January housing starts are set to be released by the Commerce Department at 8:30 a.m. EST Wednesday.