Refinances are seeing a sharp rise in interest rates on mortgages. This is causing a significant drop in loan demand. The Mortgage Bankers Association’s seasonal adjusted index shows that the volume of total mortgage applications declined 8.1% last week.

Average contract interest rates for 30-year fixed rate mortgages (with conforming loan balances of $647,200 or lower) have increased to 4.50%, from 4.27%. Points rose to 0.59, from 0.54 for loans with 20% down payments.

Mike Fratantoni is the chief economist at the MBA. He stated, “The rate increase came as the markets price in a slower pace of rate rises as well as the expectations of fewer MBS buys from the Federal Reserve.” According to the MBA’s March forecast, mortgage rates will trend higher in 2022.

Refinance applications for home loans, which are sensitive to rate movements, decreased 14% over the week before and fell 54% over the week prior. Refinance activity has declined to 44.8% from 48.4% last week.

“The number of high-quality refi candidates was already down more than 75% through last week – these latest jumps will likely cut that population even further,” said Andy Walden, vice president of enterprise research at Black Knight. While we’re seeing a decline in total lending activity, the cash-out volume continues to be stronger than rates/term refis for rising rates. Lenders will find this market important, especially with the $10 trillion of tappable equity that is still available.

The week’s mortgage applications for home purchases, which are more sensitive to rate movements, dropped 2% and was 12% below the previous week. Due to increasing rates, economists are beginning to lower their forecasts for home sales. As a result of a rising supply-demand imbalance, the housing market has become more expensive. Inflation is increasing, which further reduces affordability.

The overall volume of purchase applications was slightly down but there was an even larger decline in FHA/VA loan demand. They are very popular with homebuyers of lower income.

Fratantoni added that “first-time homebuyers who rely upon these government programs face increasing challenges due to both the rapid rise in home prices as well as higher mortgage rates.”