March 8, 2023

Mortgage rates have moved quickly from ~6% to ~7% over the past 30 days:

Mortgage Rates Head Back Over 7% After Powell Testimony
30 Yr. Fixed: 7.03% (+0.04% ▲) | 15 Yr. Fixed: 6.48% (+0.03% ▲) | https://t.co/hpyoRNAipg

— Mortgage News Daily (@mortgagenewsmnd) March 7, 2023

 As would make sense, new mortgage applications are down a staggering 42.3% year over year.  

The seasonally adjusted Mortgage Purchase Application Index rises 6.6% to 154.4.

On a year-over-year basis, total purchase apps are down 42.3%. pic.twitter.com/UdfWpgPzle

— Lance Lambert (@NewsLambert) March 8, 2023

There is very little demand for new mortgages.  

According to a recent article by CNBC: Mortgage demand from homebuyers has dropped to a 28-year low

Why are more people not applying for mortgages?  

No Refis.  

Virtually everyone with a mortgage was able to refinance before March 2022 when mortgage rates started to skyrocket.  Thus, there is little to no mortgage refinance activity.  This was a booming business for several years as mortgages rates hovered around 2.7-3%.  

Relatively Few New Buyers Coming Into the Market

Buyer sentiment is very very low.  Potential buyers sense that prices are declining (fact) and that real prices are very high.  Why buy now when the probability of real home prices being cheaper in the future is quite likely.  Likewise, there is a real affordability issue where even if a qualified buyer who is approved for a mortgage, even if they can qualify for and receive loan, real prices is uncomfortably high in relation to their other options (typically renting).  

Move Up Buyers

Another source of buyers is move-up buyers, or people who sell a house and subsequently buy another house.  Seller sentiment is also very very low.  Sellers understand that it’s not as easy to sell their house now, and prices they might have gotten this past Spring 2022 are long gone.  Additionally, if a seller was to put their house up for sale, and was to achieve a price they were happy with, they would no doubt have some profit or equity from their sale, but they would then be forced to buy into the market at very high prices and accept a mortgage rate which is likely twice as high as the rate they are giving up.  A move-up scenario might work out from the standpoint that a person might be able to engineer their sale and another purchase successfully, but their cost of ownership would no doubt go up significantly at a time when many people are getting squeezed in all facets of their cost of living.  In short, the move-up segment has largely been taken away as well.  

Prices

Home prices are too high in relation to borrowing costs for most buyers to consider a purchase, even if qualified.  This is a clear sign that prices will need to come down significantly (at current or higher mortgage rates) for the market to keep functioning.  Employment numbers are still relatively good.  This suggests that people could in fact apply for mortgages and they would be approved.  The issue is if you could have afforded and purchased a 2 bedroom condo in 2021 at $400,000 and 3% mortgage, and now that same condo is $500,000 at 7% mortgage, you either a) can no longer afford that condo,  Instead you can afford a studio condo at half the size in same building for same payment. b) can still afford it but its such a stretch of your take-home money that you just aren’t willing to do it.  These more qualified or more sophisticated buyers are being more cautious, or perhaps putting their home buying on hold or giving up.  

Rate Shock

There’s something psychological about knowing you could have borrowed at 3% one year ago and now it’s 7%.  Putting aside even what that means for payments etc.  (i.e. let’s assume you could have bought at 3% and also at 7%, same property, you could have reasonably afforded both scenarios, just the first one would have cost you a lot less). Psychologically, some people will opt to wait and see if rates come back down just out of principal and investment strategy.  

Renting is Cheaper

Renting has been cheaper than buying in Denver since at least late 2020, and currently it is significantly cheaper than buying in apples to apples comparisons.  If renting was much more expensive in relation to buying at 7% rates, the mortgage application numbers would be a lot better despite the high(er) rates of 2023.  

There just aren’t as many qualified potential buyers anymore

A Percentage of Buyers who may have qualified for purchase price several years ago at 3% mortgage rates just wouldn’t be qualified anymore at current rates.  These potential buyers aren’t even bothering to apply or think about home purchasing.  

What this means for Demand and Home Sales?

It goes without saying that a declining number of mortgage applications is an important leading indicator that demand will continue to soften and sales numbers will continue to decline into 2023 and possibly beyond.