Is the Housing Market Losing the Battle Against Higher Interest Rates?

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While interest rates remain low on a historical basis, the recent rise continues to impact consumers as applications for mortgages posted another dismal week.

According to the Mortgage Bankers Association’s latest report, for the week ended August 16, loan applications dropped 4.6 percent on a seasonally adjusted basis from one week earlier — the thirteenth decline in 15 weeks. The figure includes both refinancing and home purchase demand and cover more than 75 percent of all domestic retail residential mortgage applications.

The industry group’s refinance index plunged 8 percent while the unadjusted purchase index declined 0.4 percent. Overall, the refinance share of mortgage activity accounted for 62 percent of total applications, its lowest level in over two years. In fact, the refinance index has crashed 62.1 percent from its peak during the week of May 3, 2013.

The average interest rate for a 30-year fixed-rate mortgage increased to 4.68 percent from 4.56 percent in the week before. The most recent average rate for a 15-year fixed-rate mortgage came in at 3.71 percent compared to 3.60 the week before. Between the beginning of May and the end of June, the average interest rate for a 30-year fixed-rate mortgage surged from 3.59 percent to 4.68 percent.

Mortgage rates are still low on a historical basis, but the recent rise is affecting affordability when combined with rising home prices. In the second quarter, 69.3 percent of new and existing homes sold were affordable to families earning the U.S. median income of $64,400, according to the National Association of Home Builders. That is down from 73.7 percent in the first quarter and is the first reading below 70 percent since late 2008.

In morning trading, home builders D.R. Horton (NYSE:DHI), Lennar (NYSE:LEN), and PulteGroup (NYSE:PHM) all traded lower. However, shares of Home Depot (NYSE:HD) edged slightly higher, while Lowe’s (NYSE:LOW) jumped 4 percent after reporting better-than-expected quarterly earnings.

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