Home buyers are increasingly gravitating towards adjustable-rate mortgages (ARMs) due to the persistent rise in mortgage rates, which is making it more challenging for them to purchase properties. As a result, there has been a notable surge in ARM applications, with a 15% increase from the previous week.
This surge in ARM applications pushed up the overall market composite index, as reported by the Mortgage Bankers Association (MBA) on Wednesday. For the week ending October 6, the market index rose by 0.6% to 179.3, compared to the previous week’s index of 214.3.
While it is evident that the current home buying and refinancing demand remains low, there has been a slight uptick in demand following a decrease in ARM rates. The purchase index, which indicates mortgage applications for property purchases, rose by 0.7% from the previous week.
Refinancing activity also experienced an increase, despite higher rates. It is possible that buyers are tapping into their home equity through cash-out refinancing. The refinance index rose by 0.3%.
According to the MBA, the average contract rate for a 30-year mortgage on homes sold for $726,200 or less for the week ending October 6 stood at 7.67%, slightly higher than the previous week’s rate of 7.53%. On the other hand, the rate for jumbo loans (30-year mortgages for homes sold for over $726,200) increased to 7.7%, up from 7.51% the previous week.
Additionally, the average rate for a 30-year mortgage backed by the Federal Housing Administration rose to 7.4% from 7.29%.
In summary, the current environment is not perceived as ideal by many homeowners and buyers, resulting in low overall demand. However, the minor decrease in ARM rates has contributed to a slight boost in demand among home buyers.
Rising Mortgage Rates Impacting the US Housing Market
The latest data reveals that the 15-year fixed mortgage rate has risen to 6.97% from the previous week’s 6.86%. On the other hand, the rate for adjustable-rate mortgages (ARMs) has decreased to 6.33% compared to last week’s 6.49%. Interestingly, the share of ARM applications has witnessed a significant increase of 15% in just one week, making up 9.2% of all mortgage applications, which is the highest it has been in the past 10 months.
The Impact of High Mortgage Rates
The current high mortgage rates are holding the US housing market hostage, discouraging potential home buyers and even homeowners who are contemplating selling their properties. These rates have created a challenging environment for buyers, making it difficult for them to secure affordable loans.
Adjustable-Rate Mortgages as a Solution
One viable option for buyers to counter these high rates is to opt for adjustable-rate mortgages (ARMs). By choosing an ARM, buyers can temporarily benefit from lower interest rates during the initial period of their loan, until it eventually resets to the prevailing rate. This allows them to take advantage of potential rate decreases in the future.
Insights from the Mortgage Bankers Association (MBA)
According to Joel Kan, the Deputy Chief Economist and Vice President at the MBA, “Application activity remains depressed and close to multi-decade lows, with purchase applications still almost 20% behind last year’s pace.” Kan also highlighted that refinance applications continue to be limited, and the average loan size has reached its lowest level since 2017.
In response to these trends, the yield on the 10-year Treasury note BX:TMUBMUSD10Y was below 4.7% during early morning trading on Wednesday. This indicates that investors are closely monitoring the impact of high mortgage rates on the housing market.
In conclusion, as mortgage rates continue to rise to multi-decade highs, it is becoming increasingly important for home buyers to explore alternative financing options such as adjustable-rate mortgages. The market remains cautious and uncertain, with limited application activity and refinance opportunities. It will be interesting to see how this affects the buying and selling dynamics in the US housing market moving forward.