Higher Inflation, Interest Rates Send Mortgage Demand To Lowest Level Since 2000

Mortgage demand sank to its lowest level in two decades over the combination of high inflation and rising interest rates pushed by a more hawkish Federal Reserve. Taken together, the two have driven demand to a level last seen in 2000.

On Wednesday, the Mortgage Bankers Association (MBA) released its latest data showing mortgage applications fell by 6.3% in the last week. At the same time, the average interest rate on a 30-year fixed-rate mortgage increased slightly from 5.74% to 5.82% -- nearly double the rate from earlier this year.

For weeks, the deterioration of demand in the housing market had to do with imbalanced supply and demand, driven by low housing inventory against surging demand. These pains have contributed to the deepening pessimism of homebuilders, who are fretting over the upswing in mortgage rates, supply chain woes that drive up construction costs and lower demand as the unaffordability in the market keeps many buyers away.

These factors are contributing to the imbalances in the housing market that itself is growing more precarious against a weakening economic outlook, said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting.

“Purchase activity declined for both conventional and government loans, as the weakening economic outlook, high inflation, and persistent affordability challenges are impacting buyer demand. The decline in recent purchase applications aligns with slower homebuilding activity due to reduced buyer traffic and ongoing building material shortages and higher costs,” Kan said in a press release.

Weakness in the housing market from these imbalances has contributed to rising concerns of a looming recession. Fed Chairman Jerome Powell acknowledged in June that demand in the housing market was softening in response to the higher mortgage rates that came with the Fed’s actions.

But Powell conceded that he did not yet know what the total impact rising interest rates would have on housing prices or residential investment in the market. He described it as still remaining "very tight", but maintained that the Fed would continue to work to drive down inflation.

“We need to get back to a place where supply and demand are back together, and where inflation is down low again and mortgage rates are low again," Powell said.