Mortgage demand drops to a 25-year low as interest rates climb

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Mortgage demand, which has suffered four straight months of declines, fell last week to the lowest level since 1997, as interest rates continued to rise.

Homebuyers' demand for mortgages dropped 4% for the week and was 38% lower than the same week one year ago, according to the Mortgage Bankers Association. Applications to refinance a home loan fell 7% compared with the previous week, in seasonally adjusted terms. Demand was 86% lower than the same week one year ago.

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The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) increased to 6.94% from 6.81%, with points decreasing to 0.95 from 0.97 (including the origination fee) for loans with a 20% down payment. That is the highest rate since 2002 on the MBA's index.

"The speed and level to which rates have climbed this year have greatly reduced refinance activity and exacerbated existing affordability challenges in the purchase market," Joel Kan, an MBA economist, said in a release Wednesday. "Residential housing activity ranging from new housing starts to home sales have been on downward trends coinciding with the rise in rates."

As potential homebuyers struggle to afford a house, given higher interest rates and still high home prices, more are now turning to adjustable-rate loans, which offer lower rates. The ARM share last week rose to 12.8% of all applications, which was the highest share since March 2008.

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