Adjustable-rate mortgage applications surge amidst high fixed-rate home loan environment

Home buyers are increasingly opting for adjustable-rate mortgages (ARMs) as 30-year mortgage rates reach their highest levels since 2000. The shift has led to a 15% surge in ARM applications, marking the highest share in ten months at 9.2% of all applications, according to data released on Wednesday. Despite the discouraging high rates, there’s been a slight increase in home buying and refinancing demand, including cash-out refinancing, due to lower ARM rates.

The overall market composite index has witnessed a marginal uptick, with the purchase index rising by 0.7%, and the refinance index by 0.3%. Average contract rates for both standard and jumbo loans increased to 7.67% and 7.7%, respectively, while FHA-backed mortgages rose to 7.4%. The rate for ARMs fell to 6.33%, and the 15-year rate rose to 6.97%.

Joel Kan from the Mortgage Bankers Association (MBA) noted that application activity remains near multi-decade lows, with purchase applications lagging by almost 20% compared to last year and the average loan size at its lowest since 2017. Buyers are betting on the likelihood of rates falling by the time their ARM resets due to rates being at multi-decade highs.

Real estate entities including MBA, National Association of Realtors (NAR), and National Association of Home Builders (NAHB) have called on Federal regulators to halt further interest rate hikes due to the unstable housing market conditions. The yield curve inversion has improved ARM pricing despite potential risk of rate hikes after five years.

Robust economic indicators have triggered fears of another Federal Reserve benchmark rate hike, causing an increase in the 10-year Treasury yield and subsequent dip in mortgage demand. The 30-year mortgage rate has topped 7% for eight consecutive weeks, a trend not seen since 2000. This, coupled with resilient home prices and a near 20% drop in mortgage application volume from last year’s pace due to housing inventory scarcity, is intensifying affordability barriers. Homeowners are also reluctant to sell due to unfavorable current mortgage rates. Despite risks, ARMs offer significant savings over five years amounting to $18,000 based on MBA averages when compared to a 30-year mortgage.

The yield on the 10-year Treasury note BX:TMUBMUSD10Y remained below 4.7%. Freddie Mac’s weekly mortgage rates differ slightly from MBA’s figures but continue to influence market trends.


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