Weekly mortgage applications fall 3.5% as rates rise

A for sale sign is shown in front of a home in Miami.
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A for sale sign is shown in front of a home in Miami.

Home loan borrowers moved to the sidelines amid a sharp rise in interest rates last week.

Total mortgage application volume fell 3.5 percent on a seasonally adjusted basis for the week ending May 8th from one week earlier, according to the Mortgage Bankers Association (MBA). Volume is still 14 percent higher than a year earlier, but that annual comparison has been shrinking for several weeks.

Applications to refinance, which are the most rate-sensitive, fell 6 percent week-to-week and have dropped 16 percent in the past four weeks; they are still 15 percent higher than a year earlier as interest rates were slightly higher in May of 2014. The refinance share of mortgage activity decreased to 51 percent of total applications, its lowest level since May 2014.

That comes as the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.00 percent, its highest level since March 2015, from 3.93 percent, with points increasing to 0.36 from 0.35 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans, according to the MBA survey.

Mortgage rates rising
Mortgage rates rising   

"Just a few short weeks ago, the average rate was 3.625 percent. That makes this the most abrupt move higher in roughly two years, with the last notable example being the mid-2013 'taper tantrum,'" noted Matthew Graham of Mortgage News Daily, referring to the sharp rise in rates after the Federal Reserve first broached the idea it would "taper" its purchases of mortgage-backed bonds.

Applications to purchase a home were basically flat last week, down 0.2 percent from the previous week, a troubling sign in the height of the spring housing market. They were, however, 12 percent higher than a year earlier. Most don't blame higher rates for the unexpectedly sluggish spring market.

"I do not feel that this [rising rates] will have a significant impact on our housing market, especially since the government's recent reduction in FHA's mortgage insurance premiums have made the program more affordable and easier for homebuyers to come into the market," said Matt Weaver, VP of Sales for PMAC Lending Services.

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The weakness in mortgage applications to purchase a home may have less to do with higher interest rates and more to do with very few listings for sale. Real estate agents across the nation are reporting stiff competition for the limited supply, leading to more bidding wars. This may push home prices higher at an unhealthy pace.

Interest rates moved even higher Tuesday, amid a selloff in the bond market. Mortgage rates loosely follow the yield on the 10-year Treasury, which rose to its highest level in six months. Rising rates can have the effect of pushing some potential buyers off the fence, worried that they will miss out on what are still historically low rates. That, however, is a short-term phenomenon. Higher rates reduce purchasing power, plain and simple.