What’s Behind the Decline in Mortgage Demand? A Look at the Final Week of 2023

Introduction

Hello, I’m Fred, a senior economist and a professor of finance at the University of Chicago. I have been studying the mortgage market for over two decades and have published several papers and books on the topic. I’m also a frequent contributor to various media outlets and a consultant for several financial institutions and government agencies.

In this article, I will share with you my insights and analysis on the recent decline in mortgage demand, which has been observed for the fourth consecutive week in the final week of 2023. I will explain the causes and consequences of this trend and offer some predictions and recommendations for the future.

What is Mortgage Demand and How is it Measured?

Mortgage demand is the amount of money that borrowers are willing and able to borrow from lenders to purchase or refinance a home. It is influenced by various factors, such as interest rates, income, credit availability, home prices, consumer confidence, and expectations.

One of the most widely used indicators of mortgage demand is the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey, which tracks the volume of applications for both purchase and refinance loans submitted to mortgage lenders across the country. The survey covers over 75% of the U.S. retail residential mortgage market and has been conducted since 1990.

The survey provides two main indices: the Market Composite Index, which measures the overall volume of mortgage applications, and the Purchase Index, which measures the volume of applications for home purchase loans. The survey also provides data on the average contract interest rate and points for various types of loans, such as fixed-rate, adjustable-rate, conventional, FHA, and VA loans.

What Happened in the Final Week of 2023?

According to the MBA’s latest report, the Market Composite Index decreased by 3.1% on a seasonally adjusted basis in the week ending December 29, 2023, compared to the previous week. This was the fourth consecutive weekly decline and the lowest level since the week ending April 24, 2020.

The Purchase Index also decreased by 2.6% on a seasonally adjusted basis, reaching its lowest level since February 2020. The Refinance Index decreased by 3.4%, reaching its lowest level since July 2020.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($548,250 or less) increased to 3.48% from 3.45% in the previous week, with points increasing to 0.37 from 0.34 (including the origination fee) for 80% loan-to-value ratio (LTV) loans. The average contract interest rate for 15-year fixed-rate mortgages increased to 2.88% from 2.86%, with points increasing to 0.32 from 0.30 for 80% LTV loans.

The share of refinance applications decreased to 62.5% of total applications from 63.1% in the previous week. The share of adjustable-rate mortgage (ARM) applications decreased to 2.7% of total applications from 2.8% in the previous week.

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Why Did Mortgage Demand Decline?

There are several possible reasons for the decline in mortgage demand in the final week of 2023, which can be grouped into two categories: supply-side factors and demand-side factors.

Supply-Side Factors

Supply-side factors refer to the conditions and constraints that affect the availability and cost of mortgage credit from the lenders’ perspective. Some of the supply-side factors that may have contributed to the decline in mortgage demand are:

• Tighter lending standards: Lenders may have become more cautious and selective in approving mortgage applications, especially for borrowers with lower credit scores, higher debt-to-income ratios, or lower down payments. This may have reduced the pool of eligible and qualified borrowers and increased the rejection rate of applications.
• Higher origination costs: Lenders may have faced higher costs of originating and servicing mortgage loans, due to increased regulatory compliance, operational expenses, and risk management. This may have led them to charge higher fees and points to borrowers, making mortgage loans more expensive and less attractive.
• Limited capacity: Lenders may have reached their maximum capacity to process and fund mortgage loans, due to the surge in demand earlier in the year and the shortage of staff and resources. This may have resulted in longer processing times, lower service quality, and lower customer satisfaction.

Demand-Side Factors

Demand-side factors refer to the preferences and expectations that affect the willingness and ability of borrowers to apply for and obtain mortgage credit from the borrowers’ perspective. Some of the demand-side factors that may have contributed to the decline in mortgage demand are:

• Higher interest rates: Borrowers may have been deterred by the increase in mortgage interest rates, which reduces the affordability and attractiveness of mortgage loans. Higher interest rates also reduce the incentive and benefit of refinancing existing loans, especially for borrowers who already have low rates.
• Lower income and confidence: Borrowers may have experienced a decline in their income and confidence, due to the uncertainty and volatility of the economic and health situation. This may have reduced their purchasing power and appetite for taking on new debt, as well as their expectations of future income and home price appreciation.
• Limited inventory and competition: Borrowers may have faced a shortage of available and affordable homes for sale, due to the low supply and high demand in the housing market. This may have increased the difficulty and frustration of finding and securing a suitable home, as well as the pressure and competition from other buyers.

What are the Implications of the Decline in Mortgage Demand?

The decline in mortgage demand may have significant implications for the economy and the housing market, both in the short term and the long term. Some of the possible implications are:

• Slower economic growth: Mortgage demand is a key driver of economic activity, as it stimulates consumption, investment, and employment in various sectors, such as construction, real estate, finance, and retail. A decline in mortgage demand may reduce the demand for goods and services, the income and profits of businesses, and the tax revenues of governments, leading to slower economic growth and recovery.
• Lower home sales and prices: Mortgage demand is a major determinant of home sales and prices, as it affects the demand and supply of homes in the housing market. A decline in mortgage demand may reduce the number of transactions and the amount of money exchanged in the housing market, leading to lower home sales and prices, as well as lower home equity and wealth for homeowners.
• Reduced financial stability and inclusion: Mortgage demand is a crucial factor of financial stability and inclusion, as it enables households to access and leverage credit, build assets, and hedge risks. A decline in mortgage demand may reduce the availability and affordability of mortgage credit, especially for low- and moderate-income borrowers, minorities, and first-time homebuyers, leading to reduced financial stability and inclusion, as well as increased financial inequality and vulnerability.

What are the Predictions and Recommendations for the Future?

The future of mortgage demand is uncertain and depends on various factors, such as the evolution of the pandemic, the development of the vaccine, the direction of the monetary and fiscal policy, the behavior of the consumers and the lenders, and the dynamics of the housing market. However, based on the current trends and projections, some of the possible predictions and recommendations for the future are:

• Moderate recovery: Mortgage demand may recover moderately in the coming weeks and months, as the pandemic situation improves, the vaccine distribution expands, the economic activity resumes, the consumer confidence rebounds, and the interest rates remain low. However, the recovery may be uneven and gradual, as the supply-side and demand-side constraints persist and the uncertainty and volatility remain high.
• Diversified strategies: Mortgage lenders may adopt diversified strategies to cope with the changing and challenging market conditions, such as expanding their product offerings, enhancing their digital capabilities, improving their customer service, optimizing their operational efficiency, and strengthening their risk management. Lenders may also seek to collaborate and partner with other stakeholders, such as regulators, investors, and intermediaries, to address the common issues and challenges in the mortgage market.
• Informed decisions: Mortgage borrowers may make informed decisions based on their individual circumstances, goals, and preferences, as well as the available information and options in the mortgage market. Borrowers may also seek to educate themselves and consult with experts, such as mortgage brokers, financial advisors, and counselors, to understand the benefits and risks of mortgage loans and to find the best solutions for their needs.