Mortgage Applications Drop 11% -- The Start of a Trend?

Mortgage activity is down. Will that continue?

Mortgage rates have fallen to historic lows in the course of the coronavirus pandemic, and that's led to a surge in home loan demand. But things may be starting to turn around.

Total mortgage application volume fell 11.4% last week compared to the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Specifically, mortgage applications to purchase a home declined 12% for the week, while mortgage refinance applications fell 11%.

The start of a trend?

Severe weather in the Southern U.S. is said to have contributed to a decline in mortgage applications. Many parts of Texas, for example, lost power for days in the wake of storms, and mortgage and refinance applications declined 40% last week in Texas alone.

But we shouldn't be too quick to blame a drop in mortgage activity on bad weather. Rising rates are also no doubt playing a role.

The average interest rate for a 30-year fixed-rate mortgage with a conforming loan balance ($548,250 or less for most of the country) increased to 3.08% from 2.98% last week. And this week, mortgage rates are up again for both new home purchases and refinances. Throw in the fact that home prices have surged across the country, and it makes for a less affordable combination for new buyers. Refinancers, meanwhile, may now be opting to bide their time and wait for rates to come back down before swapping their existing home loans for new ones.

Of course, whether mortgage activity continues to decline will depend largely on how rates trend in the coming weeks. While the Federal Reserve is expected to keep its short-term rate at close to 0% for the foreseeable future, longer-term bond yields have started to increase. And mortgage rates are generally more influenced by the 10-year Treasury than by Federal Reserve rates.

That said, even if mortgage rates continue to creep upward, they're likely to remain competitive on a historic basis for at least the remainder of 2021. And as more properties hit the market during the spring, which is typically when that particular boom kicks off, an increase in inventory could help drive home prices down. That alone could cause mortgage activity to tick upward again.

All told, the fact that mortgage demand dropped last week isn't surprising, and we may see several weeks of decline before a springtime surge in applications. Even if rates don't drop back down to their lowest point, home buyers and refinancers are likely to recognize that in the grand scheme of how mortgage rates have trended, there are still plenty of good deals to be had.

Furthermore, as the economy slowly but surely improves, more people may land in a position where they're able to buy a home -- or qualify for a mortgage to do so. Right now, job loss concerns may be preventing some potential buyers from going out and house-hunting, but if the economy stages a notable recovery later this year, it could lead more people to go out and apply for mortgages to buy a place of their own.