Rising Mortgage Rates Fail to Dampen Demand for New Homes

Rising Mortgage Rates Fail to Dampen Demand for New Homes

Last week, mortgage rates saw another increase. However, this rise did not discourage potential buyers, particularly those in search of newly constructed homes. According to the Mortgage Bankers Association’s seasonally adjusted index, total mortgage application volume experienced a 3% surge compared to the previous week. It is important to note that an additional adjustment was made to account for the Juneteenth holiday. Although mortgage rates remain high, applications for purchasing a home rose by 3% for the week. However, it is worth mentioning that these figures were 21% lower compared to the same period last year. Despite this, there has been a continuous increase in applications over the past three weeks, reaching the highest level since early May.

New Home Sales Boost Purchase Activity

Joel Kan, the vice president and deputy chief economist of the MBA, stated that the surge in purchase activity can be attributed to new home sales, as buyers explore options beyond the existing-home market. On the other hand, existing-home sales have been hindered by the scarcity of available inventory for sale. Many potential sellers are holding onto their mortgages with lower rates, which is impeding the growth of existing-home sales.

According to a report from the U.S. Census, sales of newly built homes in May skyrocketed by 12% compared to April and witnessed a 20% increase compared to May 2022. Builders are playing a significant role in stimulating demand by offering incentives, such as mortgage rate reductions.

Jumbo Rate Surpasses Conforming Rate Due to Regional Bank Failures

In the previous week, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances (amounting to $726,200 or less) slightly increased from 6.73% to 6.75%, while points remained steady at 0.64 (including the origination fee) for loans with a 20% down payment. Conversely, the average rate for 30-year fixed-rate mortgages with jumbo loan balances (exceeding $726,200) experienced a more significant increase from 6.80% to 6.91%.

Joel Kan shed light on the widening spread between jumbo and conforming rates, stating that it has reached 16 basis points. This marks the third consecutive week that the jumbo rate has surpassed the conforming rate. It is worth noting that, historically, the jumbo rate has averaged around 30 basis points less than the conforming rate from May 2022 to May 2023. The widening spread and increase in the jumbo rate can be attributed to recent regional bank failures. Since Fannie Mae and Freddie Mac do not purchase loans of such size, lenders hold jumbo loans on their balance sheets. As a result, bank credit, especially at community banks, has significantly tightened, leading to higher rates.

Refinancing Applications Experience Decrease

While applications to refinance a home loan saw a 3% increase for the week, they were 32% lower compared to the same period last year. It is worth noting that the majority of borrowers currently hold mortgages with interest rates below 4%.

In summary, despite the rise in mortgage rates, the demand for new homes remains robust. New home sales are driving purchase activity, while existing-home sales continue to face challenges due to limited inventory. The widening spread between jumbo and conforming rates can be attributed to recent regional bank failures, causing lenders to hold jumbo loans and resulting in higher rates. Refinancing applications have experienced a decline, as most borrowers already hold mortgages with favorable interest rates.

US

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