Mortgage Applications Dropped Last Week Even as Interest Rates Fell

Mortgage applications declined by 1.2% from a week earlier even as interest rates fell, another sign that potential home buyers are waiting to see if the summer may bring better market conditions. 

The dropoff in applications came as the rate on the average 30-year fixed loan dropped five basis points to 6.5%, the first time rates have dropped in three weeks, according to the Mortgage Bankers Association.

The 6.5% figure for the week ending April 28 is still 114 basis points lower than one year ago, but concern over affordability, supply chain issues and reactions to the Federal Reserve are keeping would-be buyers stuck in a dampened market. 

“Elevated rates continue to both impact homebuyer affordability and weaken demand for refinancing,” said Joel Kan, the vice president of the MBA.  “Home purchase activity has been very sensitive to rates and local market trends, including the very low supply of existing-home inventory. However, newly constructed homes account for a growing share of inventory, giving more options for prospective buyers."

Home prices rose in March while inventory shrank

Inventory shortages have worsened as home prices have increased, according to Black Knight, a data analytics firm. Home prices rose in March for the third month in a row, the firm’s Mortgage Monitor Report found. 

"A modest bump in homebuyer demand ran headlong into falling for-sale supply, leading to the third consecutive monthly increase in home prices after they'd been pulling back from recent peaks through the tail end of 2022, essentially nationwide," said Black Knight Vice President of Enterprise Research Andy Walden.

Active listings were down for the sixth consecutive month, to the lowest level since April 2022, according to the report. Almost 90% of major markets' supply took a downturn.

The hope for new listings is also slim with 30% fewer properties coming onto the market in March than before the pandemic. That is bigger than the gap in January and February.

The news comes as a Federal Housing Finance Agency rule goes into effect that would change fees based on a mortgage-seeker's credit score.

The changes impact Fannie Mae and Freddie Mac single-family loan-level pricing adjustments, adding a risk-based fee to mortgage borrowers. Twenty-seven state financial officers signed a letter voicing concerns about how the change could impact the economy and put further stress on the already turbulent banking system. 

Concerns about bank stability are taking a toll on lenders as well, according to the MBA, another layer of difficulty for buyers. 

“The jumbo-conforming spread continues to narrow, an indication that there is reduced lender appetite for jumbo loans following the recent turmoil in the banking sector and heightened concerns about liquidity. The spread was 13 basis points last week, after being as wide as 64 basis points in November 2022,” Kan added.