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2023 Closes with Unexpected Dip in Mortgage Demand Despite Lower Interest Rates

In the closing week of 2023, the mortgage market witnessed a significant downturn with a 9.4% drop in demand, despite a recent decline in interest rates. This unexpected trend was observed during the week ending December 29, as reported by the Mortgage Bankers Association's seasonally adjusted index. The decline occurred even though the average rate on the 30-year fixed mortgage concluded the year at 6.76%, exhibiting a decrease from two weeks prior but an increase compared to the previous week.

This rate, however, remains considerably lower than the mid-October peak of 8%. Joel Kan, MBA’s vice president and deputy chief economist, attributes this to the market's reaction to decreasing inflation and the anticipation of rate cuts by the Federal Reserve. While this reduction in rates has injected a sense of optimism in the housing market for 2024, the response in terms of purchase applications has been tepid.

The year 2023 also saw a 15% increase in refinance loan applications compared to the previous year, while applications for home purchase mortgages dropped by 12%. This indicates a keen interest in refinancing among homeowners, likely due to the majority having secured rates in the 4% to 3% range during the initial two years of the pandemic when rates were at record lows.

Despite these lower rates, the housing market continues to struggle with limited supply and escalating home prices. The central question now is whether the current 6% rate range will persist and if this will be sufficient to motivate potential sellers, thereby enhancing market supply. Homebuilders appear as a hopeful sector, especially as they offer rate buy-downs, though new homes are typically priced higher.

As the week commenced, mortgage rates have risen slightly, reaching their highest point in two weeks, but still within the 6% range. Matthew Graham, chief operating officer at Mortgage News Daily, suggests that the future trajectory of these rates will likely depend on upcoming economic data, including the minutes from the recent Federal Reserve meeting and the government's monthly employment report.

Source: CNBC, MMCG

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