Borrower demand declines amid a volatile mortgage market 

Borrower demand for home loans increased in the first three weeks of 2023, sparking optimism among mortgage industry executives and loan officers. But don’t fool yourself — there are signs of volatility on the horizon. 

“Overall application activity declined last week despite lower rates, which is an indication of the still volatile time of the year for housing activity,” Joel Kan, Mortgage Bankers Association (MBA) vice president and deputy chief economist, said in a statement. 

According to the MBA, mortgage applications decreased 9% across the board for the week ending January 27 compared to the week prior. Demand for purchase loans declined by 10% in the same period. Meanwhile, applications for refinancings fell by 7%.  

At the same time, the 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) decreased one basis point to 6.19%. This marks the fourth week of declines, resulting in mortgage rates that are almost 40 basis points lower than a month ago. For jumbo loans (greater than $726,200), rates increased from 5.92% to 5.99% this week. 

“Treasury yields were higher on average last week, while mortgage rates decreased, which was a sign of a narrowing spread between the two,” Kan said. “The spread between mortgage rates and the 10-year Treasury has been abnormally wide since early 2022 — further narrowing of that spread is expected to put downward pressure on mortgage rates in the coming months.”

The seasons ahead 

Industry experts believe that the purchase market will recover in the spring, despite the volatility. 

“Purchase activity is expected to pick up as the spring homebuying season gets underway, bolstered by lower rates and moderating home-price growth. Both trends will help some buyers regain purchasing power,” said Kan.

Nik Shah, CEO of Home LLC., said buyers are tired of waiting for lower prices and rates. 

“So, they are getting 5-year and 7-year adjustable-rate mortgages instead of 30-year fixed-rate mortgages,” Shah said. 

The MBA data shows refinancings were 31.9% of the total applications for the week ending January 27, followed by FHA (12% of the total), VA (11.9%) and ARMs (6.7%). The average contract interest rate for 5/1 ARMs decreased to 5.38% last week, down from 5.44% the previous week. 

According to Shah, homeowners aren’t selling because they are locked on low rates. 

“Most listings are dilapidated homes or new constructions,” he said. “Homes in many markets are already starting to get multiple offers. We’ll learn more during this Summer rush.” 
Shah’s projections are that a 4% increase in home prices will occur in 2023 – but that’s only if the Federal Reserve pivots and starts dropping rates after the current tightening monetary policy crashes the labor market.