The Federal Housing Finance Agency (FHFA) reported that contract mortgage rates rose by four basis points to 4.05 percent in January 2018. After falling to 3.93 percent following its February 2017 peak of 4.18 percent, rates on purchases of newly built homes have risen 12 basis points over two months to 4.05 percent. At this level, mortgage rates remain below the recent high reached back in February.
However, information provided by Freddie Mac suggests that rates on purchases of newly built homes may eclipse their February 2017 level. Contract mortgage rates released by Freddie Mac, which covers all originations that it purchases, track the rates on purchases of newly built homes reported by the FHFA closely. In February 2018, Freddie Mac reported that mortgage rates rose 30 basis points to 4.33 percent, exceeding its December 2016 level of 4.20 percent.
The recent decreases in sales of new and existing homes, as well as the potential decline in future existing home sales may partially reflect the increase in mortgage rates. Previous analysis illustrated how monthly increases of rates on purchases of newly built homes in excess of two basis points, considered large in historical terms, were associated with, on average, a decline in sales of new homes over the same month. The analysis suggests that rapid increase in rates over a short period of time can lower sales in the same month. However, historical analysis shows that the adverse response is typically temporary.
Using information on mortgage applications suggests that purchase mortgage demand was less affected by higher rates of 2016 and, to date, are little affected by the recent mortgage rate increase. The figure below indicates that purchase applications for conventional mortgages has remained nearly flat between September 2017 and December 2017. There was a slight increase in January 2018 possibly reflecting buyers’ attempts to purchase a home before rates rose to higher levels, but then a slight decline in demand for conventional purchase mortgages in February, shown in the figure below. Demand for government purchase mortgages, also shown below, rose more between October 2017 and January 2018, but from lower levels, then, demand for these mortgage products subsided modestly in February 2018.
Shown in the figure above, although refinancing applications fell significantly in response to higher rates in late 2016, and have declined over the September 2017 to January 2018 mortgage rate increase period, the decline in February was smaller compared to the extent of the rate increase in the same month and mostly offset the modest increase in January.
Rising rates have not had a significant impact on mortgage demand, especially applications for conventional purchase mortgages. This may reflect the strength of underlying demand fundamentals, suggesting that lower sales are temporary. On the other hand, the decline in pending home sales suggests that purchase mortgage applications may extend their February decline or that applications will not translate into originations. The February 2018 decrease in applications for both conventional and government purchase mortgages as well as any changes in credit standards, a metric of mortgage supply, will be closely tracked for evidence of a longer declining trend.