A recent surge in mortgage rates is weighing heavily on homebuyers, causing a sharp and sustained drop in mortgage applications across the U.S.

This downturn marks the fourth consecutive weekly decline, signaling growing pressure from elevated borrowing costs.

Mortgage Applications Plummet for Fourth Straight Week

For the week ending Oct. 18, mortgage applications in the U.S. tumbled by 6.7%, extending a 17% plunge from the previous week, according to data shared Wednesday by the Mortgage Bankers Association.

This represents the fourth straight week of contraction in mortgage demand, as the recent uptick in interest rates to two-month highs has increasingly discouraged potential buyers from entering the housing market.

Notably, applications to refinance existing home loans, which tend to be more sensitive to short-term interest rate changes, dropped 8.5% for the week, extending a prior 26% plunge. Applications for new home purchases also declined by 5%, reflecting a broader weakness in housing market activity.

The drop in activity coincides with a significant rise in key interest rates, driven by robust economic data and market expectations of a less accommodative stance by the Federal Reserve for the rest of 2024.

Mortgage Rates Remain Elevated

The average interest rate for a 30-year fixed-rate mortgage with conforming loan balances (up to $766,550) remained stable at 6.52%, close to its two-month high.

For larger loans (jumbo mortgages, which cover amounts above $766,550), the rate edged down slightly to 6.73%, a marginal drop of 3 basis points from the previous week.

Last week, Joel Kan, vice president and deputy chief economist at the Mortgage Bankers Association, highlighted, “Demand is holding up to an extent for prospective first-time buyers. The recent uptick in rates has put a damper on applications.”

Mortgage rates have surged in tandem with rising long-term Treasury yields, which had been steadily climbing before leveling off last week.

The rising trend in Treasury yields resumed this week, further clouding the outlook for mortgage demand.

Yields on 30-year Treasury bonds have jumped by over 10 basis points to 4.5% as of Wednesday. Given that Treasury yields serve as a key benchmark for mortgage rates, any further increases could intensify pressure on already weakened mortgage demand.

Impact On Mortgage-Related Stocks

The cooling of the housing market is also evident in the declining performance of mortgage-related stocks.

Both the iShares Mortgage Real Estate ETF REM and the VanEck Mortgage REIT Income ETF MORT have seen significant declines, falling for two consecutive days this week.

Since their highs in September, both ETFs have shed about 8-9% in value, underscoring the negative impact of declining demand in the market performance of mortgage real estate investment trusts (REITs).

The popular iShares 20+ Year Treasury Bond ETF TLT, which tracks long-term Treasury bonds, has dropped 2% for the week and is down 9.5% from its late September levels.

Looking ahead, market participants remain focused on the Federal Reserve’s next move.

The CME FedWatch tool, which tracks market-implied expectations for Federal Reserve policy, shows an 87% chance that the central bank will cut interest rates by 25 basis points at its next meeting on Nov. 7.

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Image created using artificial intelligence via Midjourney.