The Federal Reserve’s December interest rate increase had a dramatic effect on mortgage applications, according to new data from the Mortgage Bankers Association, with refinance requests falling significantly.
“Refinance application volume increased for three weeks in a row in early December ahead of the Fed’s announcement that it was raising the federal funds rate,” said Lynn Fisher, the association’s vice president of research and economics. “During the two weeks following their announcement, holiday-adjusted refinance activity dropped substantially, even though the 30-year fixed rate increased by only 4 basis points over the same period.”
During the week ended January 1, 2106, the MBA’s Market Composite Index, a measure of total loan application volume, plunged 27 percent from the previous two weeks. (The index results were adjusted to account for the New Year’s and Christmas holidays.) The Refinance Index dropped 37 percent, and the home Purchase Index fell 15 percent.
Refinance requests made up 55.4 percent of all applications, down from a 62.8 percent share two week earlier.
During that same time, the average rate on a 30-year fixed-rate conventional mortgage rose to 4.01 percent, excluding points, according to mortgage backer Freddie Mac, up from 3.97 percent two weeks before. It was the first time the rate had surfaced above 4 percent in over five months. Even that small of a jump in interest rates made refinancing much less attractive to homeowners.
The MBA also reported that the popularity of adjustable rate mortgages (ARMs) fell in the past two week with only 4.7 percent of all applications requesting ARM loans, down from 6.1 percent. FHA loan requests increased however, making up 14.6 percent of all applications, compared with 12.9 percent two weeks ago. And Veterans Affairs (VA) loans applications made up 12.9 percent of the total, up from 10.5 percent in the previous two weeks.