Mortgage application volume fell dramatically over the past two weeks, even when adjusted for the holidays. This was likely due to a rush on home loans at the beginning of December, before the Federal Reserve increased its funds rate for the first time in nearly a decade. All that demand being pulled forward made for a steep drop-off.
Total mortgage applications slid 27 percent on a seasonally adjusted basis for the week that ended Friday, compared with two weeks earlier, according to the Mortgage Bankers Association. The numbers for both weeks were adjusted for the Christmas and New Year holidays, when banks were closed.
Refinance applications, which are most rate-sensitive, decreased 37 percent from two weeks ago, seasonally adjusted. Applications to purchase a home fell 15 percent, but were 22 percent higher than the same period one year ago.
"Refinance application volume increased for three weeks in a row in early December ahead of the Fed's announcement that it was raising the federal funds rate," said Lynn Fisher, the association's vice president of research and economics. "During the two weeks following their announcement, holiday-adjusted refinance activity dropped substantially, even though the 30-year fixed rate increased by only 4 basis points over the same period."
It could be that borrowers rushed into the mortgage market out of unwarranted fear that interest rates would suddenly rise when the Federal Reserve raised its funds rate. Mortgage rates do not follow the Fed; they follow yields on mortgage-backed bonds, which loosely follow the yield on the 10-year Treasury. It is widely expected that rates will rise throughout 2016, as the economy improves, but rates actually fell the day of the Fed announcement and the day after, then moved slightly higher.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.20 percent last week from the previous week. That is its highest level since July, with points decreasing to 0.42 from 0.49 (including the origination fee) for 80 percent loan-to-value ratio loans.
Mortgage rates are still historically low, and not the cause of the current slowdown in home sales, which fell dramatically in November. Fast-rising home prices and very tight supply of homes for sale have combined to weaken sales. Higher rents are also keeping young, potential buyers from saving for a down payment.