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Lower mortgage rates, higher inventory boost demand for home loans 

Despite the uptick in mortgage applications, the market is not “out of the woods,” according to executive

Like its competitors, Tennessee-based First Community Mortgage, Inc. (FCM) reduced the company’s size through 2022 amid a tough mortgage market. At the start of 2023, the company is investing in training the sales team on tactics to start growing the business again. Surprisingly, the landscape is helping.

“There is certainly optimism in the air as mortgage applications have started to pick up on,” Keith Canter, CEO at First Community Mortgage, said. “The optimism is based on two factors: one, we’ve seen a nice trend in rates, moving lower over the last few weeks; and two, more and more houses are building up in inventory, so we’re seeing sellers being more willing to work with buyers.”

Altos Research data confirms Canter’s perception that there are more houses in inventory. The weekly inventory rose from 471,349 to 472,688 from January 6 to January 13.  

Meanwhile, a Mortgage Bankers Association (MBA) report covering 75% of all U.S. retail and residential market shows how demand for home loans has quickly increased. The Market Composite Index, a measure of mortgage loan application volume, rose 27.9% on a seasonally adjusted basis for the week ending January 13 compared to one week earlier.

“Mortgage rates are now at their lowest level since September 2022, and about a percentage point below the peak mortgage rate last fall,” Mike Fratantoni, MBA’s senior vice president and chief economist, said in a statement. “As we enter the beginning of the spring buying season, lower mortgage rates and more homes on the market will help affordability for first-time homebuyers.”

After peaking at 7.36% on October 20, mortgage rates are in the lower 6%, according to different data sources. 

The MBA measured the 30-year fixed rate for conforming loan balances ($726,200 or less), which decreased to 6.23% this week from 6.42% last week. Jumbo loans (greater than $726,200) went from 6.09% to 6.08% in the same period. Rates were even lower at Mortgage News Daily, marking 6.17% on Wednesday morning for conforming loans.

Taking advantage of refis

Borrowers are taking advantage of refinancings this week amid lower rates. The MBA data shows that the demand for the product rose 34% this week compared to the previous week. Meanwhile, purchase apps had a 25% increase in the same period. 

Despite these gains, refinance activity remains more than 80% below last year’s pace and purchase volume remains 35% below levels from one year ago.  

According to Logan Mohtashami, lead analyst at HousingWire, seasonality impacts the mortgage apps data since the market is coming off a seasonal low in volume.

“So, you can see some crazy moves in the MBA index that had a waterfall dive in 2022,” Mohtashami said.

Regarding refinancings, which dried up last year amid surging rates, the analyst said demand is recovering.

“People want better cash flow, so they are not thinking that much ahead whether rates will go down even further,” Mohtashami said. “If rates fall more, they will refinance again.”

The refinance share of mortgage activity increased to 31.2% of total applications this week from 30.7% the previous week. 

What to expect

For Canter, the mortgage market is not “out of the woods,” despite the better landscape at the beginning of 2023, as there’s no guarantee that rates will stay at the current level.   

“The Federal Reserve will take the gas off of raising short-term rates, but there’s no guarantee. So, we have interest rate risk,” Canter said. “And the demand out there will create a floor on how far home prices can fall. Builders are slowing down the number of homes they’re building, which adds more pressure to inventory.”

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