Falling Mortgage Rates further Reduce Demand in the Housing Market (Not so Paradoxically)

Waiting for even lower mortgage rates comes on top of all the big issues that crush demand in the housing market.
By Wolf Richter for WOLF STREET.

For the fourth week in a row, applications for mortgages to purchase a home fell, despite declining mortgage rates, and hit the lowest level since the week ended July 30, when mortgage rates were nearly 50 basis points higher. The much-ballyhooed idea that lower mortgage rates would unleash waves of demand is running into reality?

Demand by homebuyers began to plunge over three years ago and has been wobbling along very low levels ever since. Compared to the same week in 2019, purchase mortgage applications were down by 35%, according to data from the Mortgage Bankers Association today.

Applications for mortgages to purchase a home are an indicator of home sales in the near future.

But the average weekly mortgage rate for conforming 30-year fixed mortgages declined to 6.37% in the latest week, according to the MBA today.

Since the reporting week ended July 30, mortgage rates have dropped by 46 basis points (from 6.83%); and since the end of May, by 61 basis points (from 6.98%). Yet mortgage applications are now lower than they were then.

Mortgage rates, according to this measure, bottomed out in September 2024 at 6.13%, just before the Fed started cutting interest rates.

Not so paradoxical. The phenomenon that already low demand for mortgages would decline further even though mortgage rates have fallen substantially is not so paradoxical.

Potential homebuyers – those not turned off by the too-high prices – see mortgage rates zigzagging lower, and they listen to the housing prophets promoting the notion that mortgage rates will fall further, and they add 2 and 2 together, and the first thing they do is wait for even lower mortgage rates.

Waiting for even lower mortgage rates comes on top of all the big issues that have crushed demand in the housing market – including way too high prices, though they have started to come down in many markets, and in some markets by a lot, for single-family homes and for condos and co-ops.

Waiting for mortgage rates to decline further is the opposite behavior of the FOMO-driven buying that had set in late 2021 and early 2022, when mortgage rates had started to rise from below 3%, as the Fed was making noises about rate hikes and tapering QE to deal with inflation, which had begun to rage.

Fear of rising mortgage rates at the time, and efforts by homebuyers to “lock in” the still low mortgage rates and buy before prices spiked even further, triggered a huge wave of demand and crazy FOMO-driven buying, which resulted in home prices exploding through the first half of 2022.

So now mortgage rates have fallen, and prices are falling in many markets, and people are waiting for still lower mortgage rates and still lower prices.

But the lower rates increased refis. Applications for mortgages to refinance an existing mortgage ticked up in the latest week, and for the past six weeks have been higher than any time since March 2022. But that spike last month took a lot of pent-up refi demand off the table, it seems.

The September 2024 spike in demand for refi mortgages occurred when the MBA’s measure of the 30-year fixed mortgage rate was even lower than today.

Refi mortgage applications (red in the chart below) rise when mortgage interest rates (blue) fall, and vice versa.

That spike of refi mortgage applications in September was small compared to the boom years of the 3% mortgages that everyone was trying to refinance into. But the current level of demand for refi mortgages is in the middle of the range of three years before the pandemic.

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