Demand for mortgage applications fell 6% last week to its lowest point since 1995, according to the Mortgage Bankers Association (MBA) survey for the week ending Sept. 29.
The decline came as the average rate on the typical 30-year loan climbed to 7.53% from 7.41% the week prior, hitting its highest level since December 2000.
The drop in applications, which was expected, reflects the uptick in borrowing costs that have forced potential buyers to the sidelines—or in search of alternatives to lessen the financial blow. For instance, adjustable-rate mortgages (ARMs), which carry a lower rate than conventional loans, have been gaining more traction as 30-year rates remain firmly above 7%.
“The purchase market slowed to the lowest level of activity since 1995, as the rapid rise in rates pushed an increasing number of potential homebuyers out of the market,” Joel Kan, MBA’s chief economist said in a statement. “ARM loan applications picked up over the week and the ARM share increased to 8%, as some borrowers searched for ways to lower their payments.”
Overall, purchase demand was 22% lower than the same week one year ago, hitting its lowest point since 1996. “Mortgage applications ground to a halt,” Kan said.
There were some signs of life however. The share of applications for Federal Housing Administration (FHA) loans increased to 14.5% from 14.1% the week prior. Last week, mortgages backed by FHA offered rates averaged 7.29%, slightly lower than conforming loans.
FHA loans are often a good option for entry-level buyers seeking competitive rates or a lower down payment requirement to qualify.
But the share of all loan applications backed by the US Department of Veterans Affairs (VA) slumped to 10.1% from 10.9% the week prior; the share of USDA loans remained unchanged at 0.5%.
The MBA also said that ARMs registered an increase, a sign that buyers are eager to get any relief they can from higher rates. The average contract rate for 5/1 ARMs was 6.49% for the week ending Sept. 29, a sharp contrast to the 7.53% rate for the typical 30-year fixed conventional loan.
But overall, activity has remained muted as would-be buyers still in the market continue to face headwinds including tight inventory and stubbornly-high home prices.
“Rates were the highest of the year,” Beatrice de Jong, real estate broker at The Beverly Hills Estates, told Yahoo Finance last week. “Presently, there are fewer buyers actively searching for homes, leading to reduced competition.”
New home sales tumbled in August. Pending home sales – an indicator of future closed sales – also declined last month, while closed sales of previously-owned homes dropped to a seven-month low.
Inventory levels, though, seem to be creeping up, which may be good news for buyers still looking for homes.
As of the week ending Oct. 3, there are now 535,000 single family homes on the market, an increase of 1.3% from the week prior. That’s a slight deceleration from the last few weeks where inventory was climbing by nearly 2%, according to Altos Research. Still, there are 5% fewer homes on the market compared to last year at this time.
“Fewer offers are being made so inventory builds,” Mike Simonsen, CEO of Altos Research, wrote in his weekly analysis.
But more pain for buyers may be on the way: The Federal Reserve suggested last month that they may keep the headline interest rates ‘higher for longer’ as inflation remains hot.
“As mortgage rates have continued to climb, most potential buyers have really had no choice but to sit on the sidelines,” Simonsen said. “For many potential people in the market, it’s really easy for them to take a wait and see attitude.”
Gabriella Cruz-Martinez is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.