Mortgage demand falls as interest rates surge to multiyear highs

Mortgage applications dropped last week due to a jump in mortgage rates. Mortgage volume is likely to fall further in the coming weeks as rates are back on the expected upward trajectory, following a brief drop at the start of the Russian invasion of Ukraine.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances increased to 4.27% from 4%, with points rising to 0.54 from 0.44 for loans with a 20% down payment, according to the Mortgage Bankers.

Mortgage rates are volatile due to uncertainty about Federal Reserve policy and the situation in Ukraine. The impact of rapidly increasing inflation in the U.S. and other parts of the world is being weighed by investors against the potential for a slowdown in economic growth due to a renewed bout of supply-chain constraints.

The number of applications to refinance a home loan fell 3% for the week, which was adjusted for seasonal factors, and was 49% lower than the same week one year ago, when rates were a full percentage point lower. The share of mortgage activity that was refinanced decreased from the previous week. Less and less borrowers can benefit from a refinance, and more and more borrowers will take out a second loan, rather than a higher rate, because they have more equity in their homes.

The number of mortgage applications to purchase a home rose 1% for the week, but were 8% lower than a year ago. Homebuyers are facing an increasingly expensive market, as prices are still gaining at a record pace from a year ago. There are still not enough homes on the market to meet demand and competition.

Home prices are so high that the average loan size in applications to buy a home was the second highest in the survey.

Mortgage rates moved higher at the start of the week, as investors anticipate an interest rate hike by the Federal Reserve. Mortgage rates don't follow the fed funds rate, but they do follow the yield on the 10-year Treasury and are influenced by the Fed's plan to reduce its purchases of mortgage-backed bonds.

Matthew Graham, chief operating officer of Mortgage News Daily, wrote that any time yields are pushing multi-year highs, it's worth having a discussion about potential shifts in the trend.