Mortgage Demand Drops to Lowest Levels Since 1996 As Interest Rates on Loans Near 8%

Key takeaways

• Mortgage applications have dropped to their lowest levels since 1996
• It comes as mortgage interest rates hit an average of 7.53% and could hit 8%
• The only relief would be the Fed cutting interest rates, relieving pressure on the stocks and bonds markets

Are we about to face a significant housing crisis? Mortgage rates are nearing levels not seen in 27 years after a panic in the bonds and stock markets saw interest rates on mortgages marching even higher, which has caused mortgage demand to fall off a cliff.

It’s left homeowners and buyers in a tricky situation, given nearly everyone with a mortgage is fixed for well under that, which has ground the housing market to a halt. The only relief might be a decrease in interest rates from the Fed.

Here’s everything you need to know about mortgage interest rates and what could help buyers and sellers get moving again.

What’s happening with mortgage rates?

According to the Mortgage Bankers Association’s seasonally adjusted index, total mortgage demand fell 6% from the previous week. Why? Mortgage rates jumped sharply from an average of 7.41% to 7.53%.

Mortgage applications are now 22% lower than they were at the same time last year and have hit the lowest levels since 1996. Applications to refinance a home now make up less than a third of all mortgage applications; this time, two years ago, refinancing was roughly three-quarters of the mortgage market.

This rise was influenced by the bond markets, which have been hitting multi-year highs. The ten-year bond, which closely influences mortgage interest rates, rose to over 4.8%, which marked a 16-year high. The 30-year Treasury bond was close to 5%, which hasn’t been seen since 2007.

It’s not just the U.S. bonds market that’s topsy turvy either: in the U.K., government borrowing is the most expensive it’s been in 25 years. German bonds have reached their highest levels since the 2011 eurozone debt crisis, and Japan’s bond yields have been the highest since 2013.

What could make mortgage rates come down?

The real question is whether the Fed will start to look at monetary easing, also known as cutting the interest rates it’s put in place to try and counteract inflation. There are a few arguments for the Fed doing this: if the economy starts to break, then the Fed has plenty of room to wind back interest rates now.

Some positive news on private payroll data coming in far below than expected gave some hope that the Fed could look to start cutting rates. But there’s a concern from the Fed still that the economy is running too hot, and further interest rate hikes are warranted.

The CME FedWatch tool, which tracks sentiment on interest rate decisions, believes there’s a 78% chance that interest rates will pause in November. December is less certain, with 65% of traders and analysts believing interest rates will pause again.

The bottom line

When house prices had already far outstripped incomes, it’s no surprise that the property market is suffering as a whole as sustained interest rates to battle inflation have been the Fed’s focus. The reality is that the market won’t get better until interest rates start to fall, but it’s still too early to tell what might happen next.