USM Financial Expert Offers Perspective on Decline in Mortgage Applications

Wed, 09/13/2023 - 12:25pm | By: Van Arnold

A report by the Mortgage Bankers Association found that mortgage applications in the first week of September fell to their lowest level in 27 years. Dr. Kimberly Goodwin, Director of the School of Finance at The University of Southern Mississippi (USM), said the news is not necessarily shocking.

“When you look at the history of interest and inflation rates, this should not be a complete surprise,” said Goodwin. “The inflation rates in 2022 and the first half of 2023 had not been seen since the late 1970s and early 1980s. Mortgage interest rates have not been this high since 2000.”

As of Tuesday, Sept. 12, the current average interest rate for a 30-year fixed mortgage stood at 7.59%, rising 6 basis points from a week ago. For those looking to refinance a current mortgage, the national interest rate for a 30-year fixed refinance was 7.78%, up 12 basis points since the same time last week.

Mortgage interest rates fell to historic lows in 2020 and 2021 during the COVID-19 pandemic. Emergency actions by the Federal Reserve helped push mortgage rates below 3% and kept them there.

The story changed in 2022. With inflation escalating, mortgage interest rates surged to their highest levels since 2002. According to Freddie Mac’s records, the average 30-year rate jumped from 3.22% in January to a high of 7.08% at the end of October.

“Some people looking to buy a home can’t remember inflation and mortgage rates ever being this high. It’s not surprising that mortgage applications are also falling to these lows,” said Goodwin.

Goodwin explains that there is a fundamental, textbook relationship between interest rates and mortgage applications.

“We expect mortgage applications to fall as interest rates rise because it becomes more expensive for home buyers to borrow money,” she said. “Since the increase in mortgage interest rates also increases the monthly mortgage payment, there are many buyers who no longer meet the lender payment-to-income ratios to qualify for a mortgage.”

The recent report reflects mortgage applications nationwide. While the Pine Belt area and Gulf South region as a whole have seen declines in applications, Goodwin points out a silver lining.

“We’ve been lucky that home prices have been growing at a slower pace here than in other places around the country,” she said. “That has helped to manage affordability for home buyers in the region. Rising mortgage rates and increasing unemployment rates, however, will continue to slow the housing market.”

What will it take to get these sobering numbers trending in a more positive direction?

“To get this situation turned around in the housing market will take a turnaround in the national economic outlook,” said Goodwin. “The Federal Reserve is still talking about raising interest rates again this year because they have not seen spending and employment slow enough to lower inflation rates.”

Added Goodwin, “As bad as it sounds, the economy in general and housing markets specifically are going to have to get worse before they can get better.”