Mortgage Demand Falls as US Credit Downgrade, Treasury Yields Push Rates Higher

FHA loan rates jump to highest levels since 2002.

Mortgage applications declined 3.1% from the previous week as the average interest rate for FHA-backed mortgages increased to 7.02%—the highest in almost 21 years—according to data from the Mortgage Bankers Association’s Weekly Mortgage Applications Survey.1

Rates Continue to Rise

The decrease in applications comes as the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances jumped to 7.09% from 6.93%, closing in on levels comparable to last November. However, the average rate for FHA-backed mortgages increased to 7.02% from 6.85% the previous week, soaring to levels not seen since 2002.1

A combination of factors, including the recent credit ratings downgrade for the U.S., pushed rates higher.

“Treasury yields rose last week, and mortgage rates followed suit, due to a combination of the Treasury’s funding announcement and the downgrading of the U.S. government debt rating,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist.1

Consumers Feel Priced Out of the Market

Despite rising mortgage rates, the market is still competitive, thanks to strong demand and tight inventory, partly because those who bought homes at record-low pandemic rates choose not to sell.

As a result, many aspiring homeowners continue to be priced out of the market. According to Fannie Mae, 82% of consumers feel that it’s a “bad time to buy” a home, a new survey high, up from 78% in June.

“We have not seen much movement in the ‘good time to sell’ component over the last few months, an indication that the current low levels of existing homes for sale will likely continue to persist in the near term,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist.2

Lenders Also Struggling, But Long-Term Outlook Positive

But consumers aren’t the only ones who are struggling.

“Rising mortgage rates are impacting demand, but lenders are struggling as well, with lower volumes leading to narrower product offerings–which lead to reduced credit availability,” said Jack Macdowell, Chief Investment Officer at Palisades Group, via email.

Macdowell said he expects the short-term pain to ease as consumer expectations adjust over the longer horizon and the desire for homeownership prevails over the impact of higher rates.

“Given the overwhelmingly undersupplied housing market, it could be argued that higher rates will actually aid in the return to a healthy supply-demand parity environment. If rates were to drop into the low 6% range, that would likely unleash pent-up demand into a highly undersupplied market, creating further pressure on home values and housing inflation,” said MacDowell.

Will New Construction Help?

New construction is doing little to ease the inventory woes for single-family homes. Compared to a year ago, the number of single-family homes under construction in June was down 17%. But according to the National Association of Home Builders, there are 994,000 apartments under construction, the highest number since May 1973.3

“While builders have slowed construction activity as interest rates have approached 7%, we anticipate mortgage rates will stabilize later this year in anticipation of the end of Federal Reserve’s tightening cycle,” said Danushka Nanayakkara-Skillington, NAHB’s assistant vice president for forecasting and analysis last month.

“In turn, this could bring home buyers back to the market as affordability conditions improve. And in another sign of cautious builder optimism, single-family permits registered their highest pace since June 2022.”3

1. Mortgage Bankers Association. “Mortgage Applications Decrease in Latest MBA Weekly Survey.”
2. Fanniemae.com. “National Housing Survey”
3. National Association of Home Builders. “Single-Family Starts Decline in June But Permits Post Solid Gain”
4. https://www.investopedia.com/mortgage-demand-falls-as-us-credit-downgrade-treasury-yields-push-rates-higher-7574471