Mortgage Demand Just Dropped to Nearly Half of What It Was a Year Ago

Given how interest rates have soared, that's not shocking.

Home buyers and owners alike enjoyed low mortgage rates from mid-2020 through the beginning of 2022. That made it easier for first-time buyers to enter the market, and it also allowed existing homeowners to reap savings by refinancing their mortgages.

But mortgage rates have been on a steady climb since the start of 2022. Part of that boils down to the fact that since the economy has improved, mortgage lenders have more leeway to impose higher borrowing costs. But also, the Federal Reserve has plans to implement several hikes this year for its federal funds rate. And mortgage rates have already risen sharply in light of those planned hikes, even though most haven't yet come to be. 

It's not shocking to see that mortgage demand is down this year as a result of soaring rates. In fact, mortgage demand recently fell to nearly half of last year's volume, reports the Mortgage Bankers Association.

Refinances are down in a big way

While total mortgage volume is down these days, refinance volume has taken a notable plunge. Last week, refinance demand fell 68% compared to the previous week. Given where mortgage rates are sitting right now, many homeowners won't reap savings by swapping their existing home loans for new ones, so that drop makes sense. 

The only exception may be those looking to do a cash-out refinance. Homeowners going that route won't enjoy savings per se, but a cash-out could help them tap their existing equity and put it to good use.

Will waning buyer demand help home prices come down?

Right now, home buyers face a double whammy -- expensive borrowing rates as well as inflated home prices. A big reason home prices have managed to hold steady at high levels is that buyers have been willing to pay up. But now that borrowing has gotten more expensive, buyers could start pulling out of the market. Once that happens, home prices could start to slip back down to more moderate levels.

But to be clear, that's not guaranteed to happen anytime soon. One thing that should help sustain higher home values is limited housing inventory. Because the market lacks inventory, buyers are likely to keep having to engage in bidding wars this year. Those are notorious for driving home prices upward. 

Affordability could be a real issue for first-time buyers

One thing existing homeowners have going for them is that higher home values have led to record-high levels of equity. That makes it easier for those who own property already to enter the housing market with competitive offers -- namely because they can sell their own homes at a higher price.

It's first-timers, rather, who are most likely to continue struggling to buy this year given where home prices and borrowing rates are. While it's clear mortgage demand is dropping as a result of rising rates, the impact on home prices could end up being gradual, making it so first-time home buyers can't really afford to own in 2022.