Rising Interest Rates Deliver a Blow to the Housing Market

The housing recovery continues to show it is heavily dependent on low interest rates induced by the Federal Reserve, as mortgage applications declined for the fourth consecutive week.

According to the Mortgage Bankers Association’s latest report for the week ending May 31, loan application volume dropped 11.5 percent on a seasonally adjusted basis from one week earlier. It was the worst decline since June 2009. This comes after an 8.8 percent decrease in the previous week. The figures include both refinancing and home purchase demand, and cover over 75 percent of all domestic retail residential mortgage applications.

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The industry group’s Refinance Index plunged 15 percent to hit its lowest level since November 2011. The Purchase Index decreased 2 percent, but is still 14 percent higher than the same time last year.

Overall, the refinance share of mortgage activity fell to 68 percent of total applications, compared to 71 percent in the previous week. The refinance share has now declined for three consecutive weeks to reach its lowest level since July 2011.

Interest rates continue to trend higher and cause reason for concern in the real estate market, as chatter about the Federal Reserve “tapering” its bond-buying programs heat up. The average interest rate for a 30-year fixed-rate mortgage came in at 4.07 percent, up from 3.90 percent in the previous week and the highest rate since April 2012. The most recent average rate for a 15-year fixed-rate mortgage also increased from 3.10 percent to 3.23 percent, its highest level since June 2012.

The latest Federal Open Market Committee minutes – released last month – ignited speculation about the Fed dialing down its presence in the market. The central bank stated, “A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth.”

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In morning trading, shares of home builders such as Toll Brothers (NYSE:TOL) and Lennar (NYSE:LEN) edged slightly higher, while The Home Depot (NYSE:HD) traded relatively flat. Shares of Lowe’s (NYSE:LOW) dropped 0.60 percent.

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