Homebuyers are growing increasingly nervous, as 30-year fixed rate mortgage (FRM) rates continue an uphill trend. In turn, they have turned to jumping on mortgage applications, hoping to strike before rates pick up too much speed.

The number of purchase mortgage applications submitted to lenders increased at the beginning of March 2022, increasing 9% from the prior week, according to the Mortgage Bankers Association (MBA). While these applications are higher on a weekly basis, the number of mortgage applications for purchase was 7% below a year earlier.

In contrast, the number of refinance applications was at half the level of one year ago when mortgage interest rates were still near a record low. Mortgage interest rates decreased slightly in early March 2022 — after continuously rising since the start of 2022.

For example, the average interest rate on a 30-year fixed rate mortgage (FRM) fell back slightly to 3.76% at the beginning of March 2022 when this survey was conducted, but has since risen sharply to 4.16%. The average 30-year FRM rate was 3.05% a year earlier. The drop in early March was slight and not entirely significant besides fueling an impulse to submit mortgage applications. Accordingly, rates are already on the rise again.

Homebuyers, spooked by recent interest rate hikes, are racing to submit mortgage applications and lock in today’s interest rate before rates increase more than they already have in 2022. The most recent rate jump can be traced to the Federal Reserve (the Fed) raising their benchmark rate in March 2022, as reported during the Fed’s latest meeting.

The Fed has also ended their purchase of mortgage-backed bonds (MBBs) and will soon begin selling their MBB balance — indicating more increases to interest rates are ahead.

Homebuyers are taking a closer look into what the future holds as higher interest rates push homeownership out of reach. That’s because when interest rates rise, buyer purchasing power declines.

Buyer purchasing power revolves around a homebuyer’s capacity to purchase property funded by mortgage money. This borrowing capacity is based on evolving factors, including:

  • homebuyer income;
  • savings; and
  • current mortgage interest rates.

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Time to buy?

Of all the factors impacting buyer purchasing power, interest rates are the most unstable. Mortgage interest rates fluctuate from week to week, often rising or falling by small amounts while following a longer trend. The general trend since late-2021 has been up.

In fact, the amount of mortgage principal for which the typical mortgaged homebuyer qualifies has decreased a significant 12.7% in the first three months of 2022 alone. In other words, while a homebuyer used to qualify for a maximum $600,000 mortgage in December 2021, as of March 2022 they now only qualify for a mortgage of up to $525,000. Absent changes to income or savings, homebuyers are rapidly finding themselves priced out — with more price constraints on the horizon.

Watch for mortgage interest rates to continue on their upward path in 2022, and the years ahead. Today’s brief spurt in mortgage applications will die down as rates continue to rise.

With reduced options for homebuyers, many will drop out, continuing to rent by necessity. Others will simply make lower offers, demanding price cuts. When demand cools enough, sellers will be forced to accept these price cuts and home prices will decrease.