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Charting The Uncharted: Flat Mortgage Demand In A Falling Rate Landscape

The housing market has had a tumultuous run over the past couple of years, with rising interest rates pushing mortgage rates to record levels. The 30-year fixed mortgage rate rose to 7.48% in August, marking the highest level since November 2000.

A severe supply crunch also impacted the housing sector, as the homebuilder sentiment has remained negative over the past few months because of sky-high construction costs.

Rate Hike Pause Signals Relief

The Federal Reserve's aggressive rate hike strategy earlier this year created upward pressure on mortgage rates, resulting in unaffordable housing. To this end, the country's largest real estate trade groups — the Mortgage Bankers Association, National Association of Realtors and the National Association of Home Builders — wrote a joint letter to Federal Reserve Chairman Jerome Powell urging him to stop rate hikes, at least temporarily, to prevent the U.S. housing market from collapsing.

Consequently, the unstable housing market, along with the sluggish economic outlook, have caused the Fed to keep the benchmark federal funds rate unchanged since July. As a result, the mortgage rates have been plummeting, providing relief to the domestic housing market. Mortgage rates dropped four times since the last week of October.

"Recent weeks' successive declines in mortgage rates will help qualify more homebuyers, but limited housing inventory is significantly preventing housing demand from fully being satisfied," Lawrence Yun, chief economist for the National Association of Realtors, said in a release. "Multiple offers, of course, yield only one winner, with the rest left to continue their search."

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Limited Supply Still A Headwind

While declining mortgage rates are a win for the housing sector, the record-low inventory of both new and existing homes is still concerning.

"Rates have declined more than 50 basis points over the past six weeks, which has helped to spur a small increase in purchase applications," Joel Kan, an economist at Mortage Bankers Association, told CNBC. "The purchase market remains depressed because of the ongoing, low supply of existing homes on the market."

Mortgage applications for new home purchases rose by 5% week over week in the last week of November, but they lagged by 19% compared to the same week a year ago.

At the same time, homebuilder sentiment, tracked by the National Association of Home Builders/Wells Fargo Housing Market Index, fell by 6 points month over month to 34 in November, which is considered to be the negative territory.

Pending home sales also fell by 1.5% month over month in October, hitting the lowest level since the National Association of Realtors began tracking the metric in 2001.

Refinance Demand

The recent decline in mortgage rates has driven people to look into refinancing their current mortgage, as even a 50 basis point change in base rates can result in a difference of several hundred dollars in monthly mortgage payments.

Despite this, refinancing home loan applications witnessed a sharp 9% decline for the week, showing a marginal 1% increase compared to the corresponding week a year ago, according to the refinance index. The decline contributed to a reduction in the refinance share of mortgage activity, dropping from 32.4% to 30.6% of total applications in the previous week.

This comes as current mortgage rates are approximately 88 basis points higher compared to a year ago, resulting in a significant drop in refinancing demand.

“Similarly, refinance activity will likely be muted for some time, even with the recent decline in rates, as many borrowers locked in much lower rates in 2020 and 2021," Kan said.

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