Mortgage Demand Plunges As 2022 Ends

Key takeaways

• After months of turbulence and interest rate hikes, mortgage demand declined during the holidays
• Total mortgage demand (measured by new mortgage applications) plunged 13.2% last week compared to two weeks before
• Meanwhile, the average contract interest rate on 30-year fixed mortgages climbed from 6.34% to 6.58%

The holiday season is renowned for delicious food, good cheer and decking various halls in ornamental finery. But as 2022 ended, housing experts noticed something unusual: fewer people preparing to decorate new halls.

That’s right: in the last weeks of the year, mortgage demand slowed way down – indicating that the housing market could soon follow.

Mortgage demand declined in late December

According to survey data from the Mortgage Bankers Association, mortgage demand plunged dramatically in the latter half of December.

Admittedly, 2022 was a rough year for the housing market, with prices cooling off astronomical highs and interest rates spiking. But while the holidays aren’t particularly hopping house-wise, the drop was drastic even by seasonal standards.

Data from the MBA’s seasonally-adjusted index showed that mortgage application volume plunged 13.2% at the end of last week compared to two weeks earlier.

MBA vice president and deputy chief economist Joel Kan said about the findings, “The end of the year is typically a slower time for the housing market. And with mortgage rates still well above 6% and the threat of a recession looming, mortgage applications continued to decline over the past two weeks to the lowest level since 1996.”

The survey also found that refinancing demand declined 16.3% in the same two-week period. (An 87% drop from the year prior.) The purchase index, which measures purchase mortgage applications, also declined 12.2%.

Kan added that, “Purchase applications have been impacted by slowing home sales in both the new and existing segments of the market. Even as home-price growth slows in many parts of the country, elevated mortgage rates continue to put a strain on affordability and are keeping prospective homebuyers out of the market.”

Mortgage rates also moved

Mortgage rates enjoyed a brief, slight decline in early December. But as the holiday season wrapped up, interest rates jumped again from 6.34% to 6.58% for 30-year fixed-rate loans. (By contrast, 2021 ended around 3.3%.) 15-year mortgage rates also rose to 6.06%, while ARM rates nicked up to 5.61%.

These rising rates contributed to sluggish mortgage demand as 2023 approached, according to the MBA.

Kan noted that while “Mortgage rates are lower than October 2022 highs” of 7.16%, they would have to drop “substantially” to generate additional mortgage demand.

Recent Fed activities could impact mortgage demand

Unfortunately, it doesn’t look like the Federal Reserve will cease rate hikes anytime soon. On the bright side, the Fed’s December 13-14 meeting minutes – released Wednesday – indicate that they could at least slow down.

Fed officials agreed during December’s meeting that the central bank should back off its aggressive 0.75%-per-meeting increase, at least temporarily. They indicated that the January 31-February 1 meeting could see a hike as small as 0.25% after seeing “significant progress” in the fight against inflation.

Raising the cost of credit in these smaller increments would effectively pump the economic brakes more gradually. If successful, the moves could continue to drag down inflation while limiting the risk of an impending recession.

However, officials stressed that they would “retain flexibility and optionality” amid the slowdown. While 0.25% rate hikes could become the normal, they remain “open” to larger hikes if high inflation persists. Officials added that the financial markets should not underestimate their commitment to fighting inflation.

Overall, the Federal Reserve tentatively projected that interest rates could rise to just over 5% by early 2024 and remain there for potentially months. During the December meeting, the Fed boosted rates another 0.5%, moving the target federal funds rate range to 4.25% to 4.5%.

The link between Fed rate hikes and mortgage activity

It’s important to remember that the Federal Reserve doesn’t directly set consumer-facing interest rates. Instead, the Fed moves the federal funds rate, which determines how much banks pay to borrow from each other overnight. As the federal funds rate rises, banks typically hike rates elsewhere, raising borrowing costs for businesses and consumers alike.

But the interplay between the federal funds rate and mortgage rates isn’t even that simple. Mortgage interest rates also move based on economic growth or decline, inflation and regional job and housing market activities.

That means that mortgage rates don’t necessarily follow the federal funds rate – but they’re often influenced by it.

For instance, the Federal Reserve often indicates whether it could raise or lower rates ahead of scheduled meetings. This practice helps set expectations and reduces the “shock factor” when decisions are officially announced. Given this head’s up, banks may shift their mortgage rates before the federal funds rate actually moves.

But this isn’t a given, as mortgage rates continue responding to external economic factors in the meantime. Occasionally, that means Fed rates and mortgage rates move in opposite directions, as occurred in December. While the Fed hiked its rate, mortgage rates temporarily declined as inflation fell. (Though, as MBA data shows, the decline soon reversed itself.)

What does all this have to do with the most recent mortgage demand numbers?

It’s simple: when interest rates rise, borrowing money gets more expensive, which discourages borrowing. On a $500,000, 30-year loan, the difference between paying 3.5% and 6.5% is $915.12 per month, or $329,442 over 30 years.

When buyers are given the choice of paying 6.5% now or waiting for rates to drop, saving for a little longer looks mighty sensible.

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Rising rates and stubborn inflation spiked the cost of homeownership in 2022. But as home prices began to slip from their highs in the latter half of the year, it seemed that Fed rate hikes were beginning to work. As the rest of December’s data rolls in – from the housing market and elsewhere – we’ll see if that supposition holds up.

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