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Economic Report: Mortgage applications drop after rates top 7%, the highest since 2001

The numbers: Mortgage applications fell 1.7% this week, as higher mortgage rates continue to depress buyer demand, dragging down the housing sector. 

Applications continue to trend at the lowest level since 1997. Rates rose for the tenth week in a row, with the 30-year hitting the highest rate since 2001.

Rates weighed down the market composite index, a measure of mortgage application volume, the Mortgage Bankers Association (MBA) said on Wednesday. 

The market index dropped 1.7% to 201.1 in the week ending October 21. A year ago, the index stood at 645.1.

Key details: The refinance index remained flat, and was down 86% compared to a year ago. 

The purchase index — which measures mortgage applications for the purchase of a home — fell by 2.3% from the previous week. 

The purchase index has dropped to the slowest pace since 2015.

The adjustable-rate mortgage share of activity dropped slightly to 12.7% applications, which is still a high share.

The average contract rate for the 30-year mortgage for homes sold for $647,200 or less was 7.16% for the week ending October 21. That’s up from 6.94% the week before, the MBA said.

For homes sold for over $647,200, the average rate for the 30-year was 6.53%. 

The 15-year dropped to 6.39%.

The rate for adjustable-rate mortgages rose to 5.86%. 

There was a slight uptick in the share of Federal Housing Administration purchase loan applications, the MBA noted, from 13.6% last week to 13.9% this week. 

FHA-backed loan rates are lower than conventional rates, with the average rate for a 30-year mortgage at 6.79%.

The big picture: The mortgage bankers are predicting a recession is in the cards for early next year, and hence for relief on rates.

The MBA is expecting a recession to hit the U.S. economy early next year, and for mortgage rates to drop to 5.4% by the end of 2023.

That will result in a 3% drop in purchase originations, they expected, and a 24% drop in refinance volume.

But presently, given the Federal Reserve’s mission to quell inflation, high rates persist. 

And so the drop in mortgage applications — which give us an early read of the state of the housing market — tells us that the sector continues to take a beating.

Purchase applications are down 40% from last year, Joel Kan, vice president and deputy chief economist at the MBA, said.

How that affects home buyers: With a $2,000 average monthly payment budget, you would’ve been able to afford roughly a $467,000 home a year ago with the 30-year at 3.3%, and with 20% down. 

Now, with rates at 7.16%, a buyer would be able to only afford a home roughly worth $320,000. 

Market reaction: The yield on the 10-year Treasury note
TMUBMUSD10Y,
4.055%

rose above 4% in early morning trading.

Got thoughts on the housing market? Write to MarketWatch reporter Aarthi Swaminathan at aarthi@marketwatch.com

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