Low mortgage rates are boosting US home sales, but builders are struggling to keep up and are focusing on more high-end construction
Low mortgage rates are boosting US home sales, but builders are struggling to keep up and are focusing on more high-end construction AFP / Frederic J. BROWN

With the Federal Reserve starting along the path of raising interest rates to combat inflation, mortgage rates have begun to creep steadily higher and applications are beginning to decline, according to the Mortgage Bankers Association (MBA).

On Wednesday, the MBA released its latest data showing mortgage applications decreased 8.1% from last week, suggesting that prospective mortgage applicants were beginning to pull back. Compared to the same time last year, the number of applications overall are 12% lower.

Mike Fratantoni, the MBA's senior vice president and chief economist, said that markets are beginning to price in the prospect of increasing interest rates later in the year and this was filtering into mortgages, including refinancing.

With rates climbing, refinancing has dropped off by about 14% since last week and was 54% lower than the same week one year ago. Fratantoni said this could be the result of the market pricing in future rate hikes as well as an expectation that the Fed will reduce its purchases of mortgage-backed securities.

The shifts appear to disadvantage those who rely on government programs from the Federal Housing Authority (FHA) in particular. Repeat homebuyers, he says, will be the ones who benefit from rising rates because of the equity gains that will be realized on sales as rates rise.

"Purchase application volume was down slightly for the week, with a larger drop in FHA and VA purchase volume," said Fratantoni, adding that, "First-time homebuyers, who rely on these government programs, are increasingly challenged by both the rapid increase in home prices and higher mortgage rates."

Higher rates are coinciding with a continued sag in the housing supply. According to the most recent data from the U.S. Census Bureau that was released on Wednesday, the number of new home sales in February fell to 772,000, which was about 6.2% lower than the February 2021 estimate of 823,000.

Throughout last year, the U.S. housing market rebounded sharply from the downturn experienced in 2020 when the COVID-19 pandemic arrived and the supply of available homes lagged behind surging demand. Complicating the situation was a pre-existing labor shortage in the construction sector and supply chain issues with construction materials driving prices higher nationwide.

But with inflation continuing on its upward trajectory, the Fed has acted. Last week, the central bank launched a rate hike of a quarter of a percentage point for the first time in three years and more rate increases are expected in the coming months.

In a speech before the National Association for Business Economics on Monday, Fed chief Jerome Powell said that he was prepared to act more forcefully against inflation if the current pace of rate hikes was insufficient to have enough of an effect.

“We will take the necessary steps to ensure a return to price stability,” Powell said. “If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so.”