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Buying a home is an emotional enough process. Add a 1,000-plus point drop in the stock market, and suddenly buyers really start to sweat.
Last week's wild ride in the markets and another rise in interest rates were likely the cause of a 4.1 percent weekly drop in mortgage application volume. The seasonally adjusted count from the Mortgage Bankers Association was just 3.5 percent higher than a year ago.
Homebuyers drove the drop, with purchase applications falling 6 percent for the week, although they were still higher by 4 percent from last year. Potential buyers are already facing a market with a record low supply of homes for sale, which in turn is causing prices to rise far faster than normal. Today's shoppers cite weakened affordability as the top reason they are taking more than three months to find a home to buy, according to the National Association of Home Builders.
Mortgage applications to refinance a home loan were also lower, falling 2 percent for the week. They were 2.8 percent higher than the same week one year ago. Refinances are most sensitive to moves in interest rates, which rose last week. Refinance volume seems to be holding more steady, as some are likely rushing in, fearing rates will go even higher in a few months.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($453,100 or less) increased to its highest rate since January 2014, 4.57 percent, from 4.50 percent, with points increasing to 0.59 from 0.57 (including the origination fee) for 80 percent loan-to-value ratio loans.
"Refinance activity is continuing along a floor, while the drop in purchase may be related to short term stock market jitters," said Joel Kan, an MBA economist. "We still expect activity to pick up as we make our way into early spring."
The spring market usually starts around Presidents' Day weekend, but buyers have been out early this year due to the intense competition for so few listings. More listings will come on the market as winter fades, but they will likely move quickly. Homes are now selling two weeks faster than they were at the same time last year, according to the National Association of Realtors.
The trajectory for mortgage rates has been higher since the start of this year, and the bond market may be in for yet another shock Wednesday, when the latest read on the Consumer Price Index is released. Mortgage rates loosely follow the yield on the 10-year Treasury.
While the overall mortgage market is losing ground, mortgage applications to purchase a newly built home jumped sharply to start the year, according to another report by the MBA. Homebuilders are benefiting from the tight supply of existing homes for sale, but could do even better if they could manage to build more entry-level homes — which are desperately needed. But builders say the high costs of land, labor and materials make it difficult to build more inexpensive homes.