As the government shutdown limits activity in many markets, mortgage applications continue to drop for the second consecutive week, aligning with projections stating that October would see less demand and less competition between homebuyers.
The Mortgage Bankers Association (MBA) reports that the market composite index—the measure of mortgage loan application volume—decreased 4.7% on a seasonally adjusted basis for the week ending Oct. 3. On an unadjusted basis, the market index decreased 5% from the previous week.
While it continues to decrease, this is not as severe as the week before, which reported a 13% decline in mortgage loan activity.
Most forms of mortgage loan applications experienced a drop from the previous week. The volume of refinance mortgage loan applications dropped by nearly 8% on both a seasonally adjusted basis and unadjusted basis. While it accounts for the largest drop of any indexes, the refinance index’s decline has slowed as the previous survey reported a 21% drop.
Mike Fratantoni—MBA’s senior vice president and chief economist—said, “With mortgage rates on fixed-rate loans little changed last week, refinance application activity generally declined, with the exception of a modest increase for FHA refinance applications.”
The purchase index decreased by about 1% on both a seasonally adjusted basis and unadjusted basis from the previous week. Despite decreasing on a week-over-week basis, the refinance index is 18% higher than the same period one year ago, and the purchase index is 14% higher as well.
“Refinance volume remains somewhat elevated relative to levels of a month ago,” Fratantoni said. “Purchase activity declined by about 1% for the week but continues to show moderate growth on an annual basis, and stronger growth for FHA loans, favored by first-time homebuyers.”
The share of refinance mortgage applications decreased slightly from the previous week, going from 55% the week of Sept. 26 down to 53.3% the week of Oct. 3.
Despite the government shutdown, FHA loans managed to increase in activity in the past week and are the only government-backed loans to do so. On a seasonally adjusted basis, the volume of FHA loans increased from the previous week by about 5.1%. More specifically, FHA refinance applications increased by nearly 7% and FHA purchase applications increased by almost 2%.
As for shares, FHA loans increased to 18.5% of total applications, up from the 16.8% the week prior. Other government-backed loans—llike VA and USDA loans—decreased in overall activity but gained shares in terms of total applications.
The volume of VA loan applications decreased from the previous week on a seasonally adjusted basis by 4%. But the share of VA loans increased to 16.3%, a very slight increase from last week’s estimate of 16.2%.
The USDA index also had a dramatic decrease by nearly a 10% drop in applications, but the share of USDA loan applications remains unchanged from the previous week, accounting for 0.4% of applications.
While it’s still unclear when the government shutdown will pass, government-backed loans remain in their typical shares, but activity may fluctuate based on the market. Federal Reserve Governor Stephen Miran stated that he expects housing inflation to cool in the future. But he believes rates should be cut further to instill confidence in the housing market.
Adjustable-rate mortgages (ARM) also increased in activity alongside FHA loans. The volume of ARM applications increased by 7.6% on both a seasonally adjusted basis and unadjusted basis. The share of ARMs also increased by 1.1%, now accounting for 9.5% of total applications.
“The ARM share increased to 9.5% last week from 8.4% the prior week,” Fratantoni added. “Our survey shows 5/1 ARM rates are averaging almost a percentage point below 30-year fixed rates, and this differential is leading more purchase and refinance applicants to consider ARMs.”
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