Mortgage rate drop triggers refis, but not purchases

Falling interest rates prompted Americans to refinance their mortgages last week, but the beleaguered brokerage industry couldn’t catch a break, as loan applications to buy homes barely budged.

Requests to refinance jumped 14 percent from the previous week, as the average 30-year loan rate fell 20 basis points to 7.17 percent, according to the Mortgage Bankers Association’s weekly report. Refinancing was up 10 percent from a year ago.

Prospective buyers remained on the sidelines, however, waiting for home prices to fall — which they haven’t done despite mortgage rates soaring since mid-2022. The problem is a familiar one: low inventory.

Usually, increases in borrowing costs cause buyers to bid less, but with historically few homes for sale, sellers continue to hold out for high prices.

But that is not an issue for homeowners who just want to replace their mortgages, either to get a lower interest rate, cash out some home equity or reduce their monthly bill by spreading debt repayment out over a longer period. Refinancing made up 34.7 percent of home loan applications last week, up from 30.6 percent the week before.

Mortgage rates have dropped six-tenths of a point since peaking at 7.8 percent in late October, data from Freddie Mac show. The Federal Reserve’s inflation-fighting efforts, which began in March 2022, have been widely blamed for mortgage rates jumping to a 23-year high. But a variety of factors affect those rates, which tend to rise and fall with the yield on 10-year Treasury notes.

“Slower inflation and financial markets anticipating the potential end of the Fed’s hiking cycle are both behind the recent decline in rates,” said Joel Kan, the Mortgage Bankers Association’s deputy chief economist.

Although refinancing activity is up from a year ago, it is still going to be meager for a while because many homeowners locked in low-rate mortgages when they had the chance. Regulators pushed interest rates down in 2020 to blunt a pandemic-induced recession, but they overshot, triggering a home-buying frenzy that was ultimately counterproductive on many levels.

Many Americans found homes too expensive to buy, and in turn pushed rents up. The number of home sales and refinancing plunged, leading to layoffs in the lending and brokerage industries and major decreases in commission revenue. Meanwhile, for-sale listings dried up because would-be sellers didn’t want to give up their low-rate mortgages to buy something else.