As Interest Rates on Home Loans Increase, Demand for Mortgages Begins to Cool Off

DENVER, CO – As interest rates on home loans continue to increase – currently, they’re hovering around 5.378 percent, which is a 13-year high – demand for mortgages have begun to cool off, showing that the housing market may be showing signs of stabilization after over a year of skyrocketing activity fueled by low interest rates and cheap money.

According to the Mortgage Bankers Association, applications for home mortgages have decreased by 12 percent for the last three weeks; year-over-year, applications are down 15 percent overall.

The reason for the lowered demand is higher borrowing costs that have turned off some prospective home-buyers; the average rate for a 30-year loan is currently approximately 5.378 percent, which is the highest level in 13 years.

Interest rates have jumped two percent since the start of 2022 alone; in contrast, interest rates were at just two percent one year ago, representing the fastest growth level since May 1994.

Associate vice president of economic and industry forecasting at MBA, Joel Kan, said that affordability concerns have become a very real reality for many homebuyers lately, after many enjoyed record-low interest rates over the course of the past year.

“Purchase applications fell 12% last week, as prospective homebuyers have been put off by the higher rates and worsening affordability conditions,” he said. “General uncertainty about the near-term economic outlook, as well as recent stock market volatility, may be causing some households to delay their home search.”

Mortgages aren’t the only facet of the loan industry that is taking a hit from rising interest rates; refinancing existing home loans is also facing a lull, with demand down a whopping 76 percent from the same period of time in 2021, with an average weekly loss of 10 percent.

Part of the reason for rising interest rates stems from the Federal Reserve’s attempts to curb skyrocketing inflation and stabilize the housing market, which hit lofty levels not seen in many years during the COVID-19 pandemic.

Earlier in May, the Federal Reserve announced the largest increase in interest rates in over 20 years, with the benchmark interest rate was raised by 0.5 percentage points to a target rate range of between 0.75 and 1 percent; that hike follows a 0.25 percent increase in March, and more hikes are expected in the near future – possibly in June and July – which will likely continue to cause borrowing costs to rise further.

The goal of the rate increases, according to Fed Chairman Jerome Powell, is to get inflation back in line with the Federal Reserve’s two percent target; currently, inflation in the United States hit 8.3 percent in April, which represents an approximate 40-year high.

“What we need to see is inflation coming down in a clear and convincing way and we’re going to keep pushing until we see that,” Powell said. “If that involves moving past broadly understood levels of neutral we won’t hesitate at all to do that.”