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Lower mortgage rates, higher demand lead to optimism for late 2023

Borrowers’ demand for home loans increased 0.85% after mortgage rates declined last week

Lower mortgage rates helped to increase borrowers’ demand for home loans last week, which in turn drummed up optimism for the mortgage industry at the end of 2022. Economists believe that if the trend continues, the market will be able to improve in the second half of 2023. 

“The latest data on the housing market show that homebuilders are pulling back the pace of new construction in response to low levels of traffic, and we expect this weakness in demand will persist in 2023, as the U.S. is likely to enter a recession,” Mike Fratantoni, Mortgage Bankers Association’s senior vice president and chief economist, said in a statement.

“If mortgage rates continue to trend down, as we are forecasting, more buyers are likely to return to the market later in the year, as affordability improves with both lower rates and slower home-price growth,” Fratantoni added. 

Last week, the Federal Reserve raised the federal funds rate by 50 basis points to 4.25%-4.50%. This was a smaller hike than the 75 bps per meeting the policymakers have stuck to since June and was due to inflation slowing more rapidly than expected in November.

Consequently, mortgage rates started a downward trend. 

The latest MBA survey shows that the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) decreased to 6.34% last week, down from the previous week’s 6.42%. Rates for jumbo loan balances (greater than $647,200) went from 6.14% to 5.97% in the same period.   

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The average 30-year fixed rate mortgage, according to Mortgage News Dailywas 6.38% on Tuesday. 

According to Mark Fleming, chief economist at First American, the housing market potential in 2023 will remain largely dependent on the path of mortgage rates. 

“If inflation decelerates toward the Fed’s target range in the second half of 2023, as is currently expected, then it’s possible that mortgage rates may decline modestly in the latter half of the year,” said Fleming. “While mortgage rates will remain high compared with pandemic-era lows, stable and potentially modestly lower mortgage rates will elevate housing market potential in 2023.”

Uptick in applications 

Borrowers’ demand for home loans quickly reacted to lower mortgage rates. The MBA survey shows that the mortgage composite index for the week ending Dec. 16 increased 0.85% from the prior week, but was down 64% compared to the same period in 2021. 

The refinance index increased 6% from the week prior and was 84.5% lower than the same week one year ago. Meanwhile, the seasonally adjusted purchase index held steady from one week earlier — and was down 36.5% from this time last year.

The survey, conducted weekly since 1990, covers 75% of all U.S. retail residential mortgage applications.

“The Federal Reserve raised its short-term rate target last week, but longer-term rates, including mortgage rates, declined for the week, with the 30-year conforming rate reaching– its lowest level since September,” Fratantoni said. “This is a particularly slow time of year for home buying, so it is not surprising that purchase applications did not move much in response to lower mortgage rates.” 

The MBA survey also shows that refinancing’s share of mortgage activity increased to 31.3% last week from 29.4% of total applications in the prior week. The FHA share of total applications decreased slightly to 13% from 13.1% the week prior. The VA share rose from 11.5% to 11.9%. Meanwhile, the USDA share remained unchanged during the same period.  

Due to long-run interest rates pulling back over the past month, Fannie Mae‘s latest forecast projects total home sales to be 5.72 million units in 2022, up from 5.67 million in the prior forecast. However, total home sales for next year are expected to decrease to 4.57 million – up from 4.42 million previously projected by the economists. 

Total mortgage origination activity is expected to be at $2.35 trillion in 2022 and $1.70 trillion in 2023, unchanged from the previous forecasts. 

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