A lot of homebuyers are calling it quits after mortgage rates topped 7%.
The volume of mortgage applications for a home purchase was the smallest in 28 years last week, according to an index from the Mortgage Bankers Association released Wednesday. The seasonally adjusted index dropped by 5% for the week ending Aug. 18 from the previous week, and was 30% percent lower than a year ago on an unadjusted basis.
The retreat in applications largely reflects the recent run-up in mortgage rates, with the rate on the popular 30-year fixed mortgage surpassing 7% and pricing out many buyers.
"Applications for home purchase mortgages dropped to their lowest level since April 1995, as homebuyers withdrew from the market due to the elevated rate environment and the erosion of purchasing power," MBA Deputy Chief Economist Joel Kan said in a statement. "Low housing supply is also keeping home prices high in many markets, adding to the affordability hurdles buyers are facing."
Rates continue to track the movement of the 10-year Treasury yield, which have spiked on concerns that the robust economy will keep inflation too high.
According to MBA's tracker, the 30-year fixed mortgage rate increased to 7.31% last week, the highest level since December 2000. A separate measure of rates from Freddie Mac showed that the average rate hit 7.09% last week, the highest point since the first week of April 2002 — and just the third time the rate crested 7% since then.
Rates have been on a choppy rise this summer, stifling demand as the peak homebuying season winds down.
"We are seeing [buyers] decide to maybe stay back on the sidelines a little bit because now they've seen changes of $200 to $300 per month in that monthly obligation, which may be a difference maker," Jason Mata, a mortgage professional with American Pacific Mortgage, told Yahoo Finance.
That's apparent in the newest sales data. Closed sales of previously owned homes declined 2.2% in July from the month before — the lowest sales pace for the month of July since 2010. It also marked the third lowest sales pace in the current housing cycle, according to data released by the National Association of Realtors on Tuesday.
"Two factors are driving current sales activity — inventory availability and mortgage rates," NAR Chief Economist Lawrence Yun said in a statement. "Unfortunately, both have been unfavorable to buyers."
Elevated mortgage rates are also behind some of the inventory challenges. Homeowners simply don't want to sell their current home and give up their existing mortgage rate for one that is twice as high when they buy a new property.
That's largely left newly built homes as the big game in town. But that's not enough to fill in the shortfall.
As a result, home prices are rising again because supply is so low. That, in turn, makes financing even more costly.
For buyers determined to stay in the market, many are turning to adjustable-rate mortgages, or ARMs, to make the numbers work. ARM applications — which increased 4% last week — made up 7.6% of all applications last week, the highest level in five months, according to MBA.
These mortgages typically feature an initial rate that's lower than the one on a fixed-rate home loan. The rate on the ARM typically adjusts higher after the initial fixed-rate period ends — such as after five or 10 years.
"Some homebuyers are looking to lower their monthly payments by accepting some interest rate risk after the initial fixed period," Kan said.
For example, per Bankrate, a 5/1 ARM — meaning five years fixed and adjustable every year after — currently averages 6.50% as of Tuesday. That compares to an average of 7.62% for a 30-year fixed loan.
"I think you're going to see more of an urgency with those that truly do need to buy because they don't really know what to expect now from interest rates," Mata said. "Every time you hit a new level of interest rate, it takes a bit of time for the consumer mindset to say, 'okay, this is the new norm.'"