Mortgage Applications Drop as Rates Hit 3-Month High

As mortgage rates creep back towards 7 percent, buyers are retreating from the loan market.

Purchase applications dropped 5 percent on a seasonally adjusted basis from the previous period in the week ending May 16, according to the Mortgage Bankers Association weekly survey. Purchase applications were, however, 13 percent higher than the mark from the same week last year.

As a whole, mortgage activity decreased 5.1 percent from the previous week. Refinancing similarly fell 5 percent from the week before but was up 27 percent from a year earlier. It points to homeowners continuing to see little incentive with refinancing, given that rates have remained high for the last few years.

Rates were a likely culprit for the overall decline in activity. The average contract interest rate for a 30-year fixed-rate mortgage with conforming loan balances rose from 6.86 percent to 6.92 percent, while points increased from 0.68 to 0.69.

Rates were at their highest levels since February, which MBA chief economist Mike Fratantoni linked to “investors concerned about rising inflation and the impact of increasing deficits and debt.” That concern may continue to grow after Moody’s downgraded the country’s credit rating a few days ago.

The VA share of total applications decreased from 13.4 percent to 12.6 percent, while the USDA share remained at 0.5 percent. The FHA share, meanwhile, increased from 17.4 percent to 17.9 percent.

The average contract interest rate for a 30-year, fixed-rate mortgage with a jumbo loan balance — greater than $806,500 — increased from 6.85 percent to 6.94 percent. The average contract interest rate for a 15-year, fixed-rate mortgage also increased to 6.21 percent.

To bring buyers — particularly first-time buyers — into the market, builders have been expanding incentive offers to prospective purchasers, including mortgage-rate buydowns, price cuts and design upgrades.