A key measure of home-purchase applications tumbled last week to a nearly three-decade low as consumer demand cooled sharply amid a recent surge in mortgage rates.
The Mortgage Bankers Association's index of mortgage applications fell 2.9% last week to the lowest level since 1996, according to new data published Wednesday.
"Mortgage applications declined to the lowest level since December 1996, despite a drop in mortgage rates," said Joel Kan, MBA's deputy chief economist. "Both purchase and refinance applications fell, with the purchase index hitting a 28-year low, as prospective buyers remain on the sidelines due to low housing inventory and elevated mortgage rates."
The data also showed that the average rate on the popular 30-year loan slid to 7.21% from 7.31% the previous week. While that marks a slight improvement, mortgage rates remain about a full percentage point higher than just one year ago.
The steep rates continued to weigh heavily on housing demand, with applications for a mortgage to purchase a home tumbling 2% for the week. Application volume is down 28% compared with the same time last year.
Demand for refinancing also continued to fall last week, sliding another 5%, according to the survey. Compared with the same time last year, refinance applications are down 30%.
The interest rate-sensitive housing market has cooled rapidly in the wake of the Federal Reserve's aggressive tightening campaign. Policymakers already lifted the benchmark federal funds rate 11 consecutive times as they try to crush stubborn inflation and slow the economy.
Not only are higher mortgage rates dampening consumer demand, but they are also limiting inventory.
That is because sellers who locked in a low mortgage rate before the pandemic have been reluctant to sell with rates continuing to hover near a two-decade high, leaving few options for eager would-be buyers.
A recent report from Realtor.com shows that the total number of homes for sale, including homes that were under contract but not yet sold, tumbled by 9.2% in August compared with the same time a year ago.
Available home supply remains down a stunning 45% from the typical amount before the COVID-19 pandemic began in early 2020, according to the report.
"Inventory remains persistently low, even with record-high mortgage rates putting a damper on demand," said Danielle Hale, chief economist at Realtor.com. "The inventory crunch continues to put upward pressure on home prices, amplifying affordability concerns and shutting some potential buyers out of the market."