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Mortgage Applications Soar as Interest Rates Retreat: Signs of a Housing Market Rebound?

Updated: May 16, 2023


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Recent data from the Mortgage Bankers Association reveals that prospective homebuyers might be taking advantage of more favorable conditions in the market. Mortgage applications experienced a significant 7% increase in the week ending January 20th, following a massive 27% spike the previous week. Such a significant surge in mortgage applications hasn't been witnessed since the initial boom back in March 2020, fueled primarily by fluctuations in the federal funds rate.


However, the available housing inventory is struggling to keep up with the growing demand. With homebuyer sentiment on the rise in December and inflation moderating at a faster pace than anticipated, many economists are now cautiously optimistic that the Federal Reserve will achieve a soft landing. So, are we witnessing the early signs of a housing market rebound?



Mortgage Applications Surge Unexpectedly


It is not uncommon for mortgage demand to fluctuate, but the recent 27.9% increase in mortgage applications during the week ending January 13th is the most significant jump since the homebuying frenzy in 2020. Refinancing activity played a significant role in this surge, with a 34% increase from the previous week, while home purchase applications climbed 25%.


In the week ending January 20th, refinance applications saw another 14.6% increase, while home purchase applications went up by 3.4%.


Despite the recent surge, mortgage activity is still notably lower than the same period last year. Refinance demand during the week ending January 13th was down 81% compared to the previous year, while home purchase applications were 35% lower. At that time, the average 30-year fixed mortgage rate stood at a mere 3.64%.



Mortgage Rates Decline


Mortgage rates have declined considerably from their November peak of 7.08%, with the current average rate for a 30-year fixed-rate home loan now at 6.13%. Simultaneously, more sellers are willing to provide concessions and accept offers below the asking price. Although the conditions may not be perfect for buyers, they are gradually becoming more favorable, driving demand at a time when inventory remains scarce.



Uncertainty Lingers


Forecasts for mortgage rates in 2023 vary among different firms. However, recent inflation data implies that the Federal Reserve's efforts might be paying off. For instance, used vehicle prices, which previously contributed to inflation, have started to decline. If the consumer price index continues to fall, mortgage rates could potentially drop even further in 2023. Nonetheless, the fight against rising prices is far from over, with services inflation increasing month-over-month. The Federal Reserve has indicated its intention to continue with rate hikes, albeit at a slower pace of 25 basis points.


There are reasons to believe that the Federal Reserve will successfully manage inflation without causing a recession. Even though the tech sector has experienced layoffs, unemployment remains low, and the number of job openings currently exceeds the number of unemployed Americans. This is happening even as rate hikes lead to a contraction in economic activity and inflation begins to slow. Consequently, some economists now anticipate a milder recession than initially predicted.


However, the ongoing pandemic continues to affect certain sectors of the economy and disrupt supply chains. The Federal Reserve still has a long way to go before achieving its target inflation rate, and higher interest rates could eventually impact employment, leading to a recession and decreased homebuyer demand.



Is a Housing Market Rebound on the Horizon?


Some cities might experience a rebound sooner than others, as home prices have already dropped compared to a year ago in several pandemic boomtowns. Cities like Austin and San Francisco are already witnessing a housing market correction, according to Redfin Economics Research Lead Chen Zhao. This may result in a quicker turnaround in prices as buyer demand increases once again.

However, it's still too early to determine if the majority of markets will experience a resurgence this year. Many potential buyers and sellers may be waiting to see where the market settles, causing new inventory to remain stagnant and suppressing demand.

Even if a nationwide rebound in homebuying activity occurs in 2023, it is unlikely to match the intensity of the 2021 boom. Interest rates are expected to remain relatively high, and with mortgage affordability being a concern for potential homebuyers, economic fears persist. Worries about job loss may dampen the demand for homes, even if unemployment remains low. Homebuyer sentiment, though improving, is still well below the levels seen in 2021.



In the face of so much uncertainty, it becomes even more crucial for investors to monitor weekly housing demand metrics, such as mortgage application data from the Mortgage Bankers Association. The housing market may not be experiencing a full-scale comeback just yet, but keeping a close eye on mortgage application trends can help you make well-informed decisions about the optimal time to buy.

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