Homebuyers are fleeing the mortgage market

Fewer Americans are filing for mortgage applications than at any time since 1996, offering the latest glimpse into a cooling housing market.

Total mortgage applications declined by 6% last week, according to the Mortgage Bankers Association (MBA). Applications for home purchases are down 22% from a year ago, while refinancing volumes dropped 11% over the same period.

Mortgage activity is grinding to a halt due to one obvious reason: rising mortgage rates, according to Joel Kan, MBA’s vice president and deputy chief economist.

"Rates for all mortgage products increased, with the 30-year fixed mortgage rate increasing for the fourth consecutive week to 7.53%—the highest rate since 2000,” said Kan.

“As a result, mortgage applications grounded to a halt, dropping to the lowest level since 1996," he added.

Mortgage rates have been on the rise since early 2022 when the Fed began its most aggressive rate hiking campaign since the 70s.

Higher is the new normal—for now

The surge in mortgage rates has bewildered homebuyers, yet economists think there’s a good chance rates will remain higher for longer.

“The trajectory of mortgage rates hasn’t unfolded exactly as we expected,” said Realtor.com economist Jiayi Xu. “We anticipated higher mortgage rates early in 2023 and a gradual decline as inflation pressure retreated, but we’ve seen almost the exact opposite pattern.”

According to Mark Fleming, chief economist at First American Financial Corporation, the market’s current trajectory suggests mortgage rates will likely hover between 6.5% and 7.5% for the remainder of the year.

This means “affordability will remain a challenge for many home buyers,” Fleming said.

Some market observers, like Matt Vernon, Bank of America's head of retail lending, believe the Fed’s next projected rate hike could cause a “slight increase” in mortgages, just enough to keep potential buyers on the sidelines.

“A Fed hike of 25 basis points won’t lead to significant shifts in mortgage rates but hints at another increase later this year may cause slight increases,” Vernon said.

Although the Fed kept interest rates on hold at its most recent policy meeting, officials’ projections left room for one more hike before 2024.

Actual homebuying remains subdued

The screeching slowdown in mortgage applications is yet another sign the housing market is hitting the hey.

Existing home sales, which represent the largest segment of the market, fell by 0.7% in August, according to the National Association of Realtors (NAR). Sales were down by a whopping 15.3% year-over-year.

The market for new builds is also subdued, with new home sales plunging by 8.7% in August to a 675,000-unit pace.

According to analysts, potential homebuyers are grappling with the “golden handcuff effect,” meaning they’re afraid to give up their existing mortgage rate for a much higher one.

Data from Realtor.com shows that eight out of ten homeowners feel “locked in” by their current mortgage.

According to mortgage data company Black Knight, over 90% of homeowners have mortgage rates below 6%. They’re unlikely to want to sell now.