Mortgage Refinance Demand Collapses 43% From A Year Ago, Higher Interest Rates And Inflation Fears Slow Market

Mortgage Refinance Demand Collapses 43% From A Year Ago, Higher Interest Rates And Inflation Fears Slow Market

mortgage refinance
Mortgage Refinance Demand Collapses 43% From A Year Ago, Higher Interest Rates And Inflation Fears Slow Market. Image: Pexels

Mortgage rates are rising as the economic recovery shifts into a higher gear, and the pool of borrowers who can benefit from a refinance is shrinking, with signs that more first-time homebuyers are entering the market.

Applications to refinance a home loan were 43 percent lower for the week ending March 5 compared with the same week a year ago, according to the Mortgage Bankers Association’s seasonally adjusted index.

“Signs of faster economic growth, an improving job market and increased vaccine distribution are pushing rates higher,” said Joel Kan, associate vice president of economic and industry forecasting for the Mortgage Bankers Association, in a prepared statement. “The run-up in mortgage rates continues to cool demand for refinance applications. Activity declined last week for the fourth time in five weeks.”

Fear of inflation tends to lead to higher interest rates of all types, according to The Mortgage Reports.

Mortgage rates are up 40 basis points since the beginning of 2020. The average contract interest rate for 30-year fixed-rate mortgages increased from 3.23 percent to 3.26 percent last week, with points decreasing from 0.48 to 0.43 (including the origination fee) for loans with a 20 percent down payment, CNBC reported.

Refinancing may be cooling, but the home purchase market is hot. Overall activity was 2.4 percent higher than a year ago, and loan sizes moderated for the second straight week — “potentially a sign that more first-time buyers are entering the market,” Kan continued. 

About 15 percent of borrowers have 30-year fixed first mortgages with rates lower than 3 percent, and about half have rates below 4 percent, according to data and analytics provider Black Knight.

Home sales stalled in April and May of 2020 during the initial coronavirus lockdowns, then had a strong rebound in the summer, CNBC reported. Mortgage applications to buy a home rose 7 percent last week over the previous week but were 2 percent higher than the same week last year.

Residential refinance mortgages made up almost two-thirds of home loans in the second quarter of 2020, the highest level in seven years. The dollar amount of refinancing was at a 17-year high, according to ATTOM Data Solutions.

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If mortgage refinancing levels off in Q2 2021, data suggests the purchase market is ready for a resurgence, given rising economic resilience in employment and vaccine distribution, Housing Wire reported.

The Mortgage Bankers Association is forecasting that the Freddie Mac survey rate — considered a reliable, representative source of regional and national mortgage rate trends — will reach about 3.5 percent by the end of 2021. “With it, a wave of young homebuyers … will support the purchase market for at least the next few years,” according to Housing Wire.

“The trouble is, both a healthy economy and higher inflation typically mean higher mortgage rates,” Peter Warden wrote for The Mortgage Reports. “So borrowers look likely to lose out on uber-cheap mortgages however things play out.”