Mortgage demand weakens after banking sector turmoil

Demand for mortgages weakened last week even as interest rates softened for the first time in weeks, according to recent data from the Mortgage Bankers Association (MBA). 

MBA’s Market Composite Index, which measures mortgage loan application volume, declined by 1.2 percent from a week earlier on a seasonally adjusted basis. 

The 30-year fixed rate dropped for the first time in three weeks, according to MBA data, to 6.5 percent. This is still 114 points higher than a year ago, Joel Kan, MBA vice president and deputy chief economist, said in a statement. 

Refinancing activity was up 1 percent from the previous week but down by more than 50 percent from last year. 

“Elevated rates continue to both impact homebuyer affordability and weaken demand for refinancing. Home purchase activity has been very sensitive to rates and local market trends, including the very low supply of existing-home inventory,” Kan said.  

“However, newly constructed homes account for a growing share of inventory, giving more options for prospective buyers,” he continued. 

Weakened demand last week follows recent distress in the banking sector, which led to the seizure and sale of a west coast regional lender, First Republic Bank, earlier this week. 

First Republic Bank was seized by regulators and sold to JPMorgan Chase on Monday after it struggled amid the fallout of the collapses of Silicon Valley Bank and Signature Bank, which were both taken over by the Federal Deposit Insurance Corporation in March. 

Kan said the spread between conforming and jumbo loans might suggest banking sector issues are impacting lending practices. 

“The jumbo-conforming spread continues to narrow, an indication that there is reduced lender appetite for jumbo loans following the recent turmoil in the banking sector and heightened concerns about liquidity. The spread was 13 basis points last week, after being as wide as 64 basis points in November 2022.”

The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances above $726,000 fell to 6.37 percent from 6.40 percent. 

Yet, Federal Reserve Chairman Jerome Powell said Wednesday, following a vote to again raise interest rates, that the banking sector has improved since the March turmoil and the system is “sound and resilient.” 

“There were three large banks from the very beginning that were at the heart of the stress we saw in early March,” Powell said. “Those have all been resolved, and all the depositors have been protected.”