Despite falling mortgage rates providing some relief to potential home buyers, mortgage applications fell to the lowest level since the turn of the century last week—providing fresh evidence that the housing market downturn may have room to run as some experts worry about how the collapse will damage the broader economy.
Mortgage applications fell 2.3% from one week earlier, according to the latest data from the Mortgage Bankers Association, pushing overall applications to the lowest level since 2000 even as rates on the popular 30-year fixed mortgage slipped to a two-month low of less than 5.5%.
In a statement, MBA’s Joel Kan said home buying applications continue to suffer from “rapidly drying up” demand as mortgage rates remain about two percentage points higher than one year ago—driving up the cost of monthly mortgage payments and making homes the least affordable they’ve been in 33 years.
Falling mortgage rates helped applications tick up earlier this month, giving some experts hope that demand may be set to recover, but in a Wednesday morning email, analyst Tom Essaye of The Sevens Report wasn’t so optimistic, pointing out rates are still close to the highest they’ve been since the Great Recession.
“The housing market is rapidly cooling,” Essaye said, adding that he expects the slowdown in housing to gradually spread through the economy over the coming months, hurting economic growth through the rest of the year.
After data on Tuesday showed housing construction slowing down much more quickly than expected last month, Comerica Bank chief economist Bill Adams was more bearish, saying housing will likely subtract from gross domestic product growth, which has already contracted two quarters in a row, over the next year.
Though he believes mortgage rates have likely already peaked this year, Adams notes the housing slowdown will “compound” difficulties in the economy, and particularly big-box retail, technology firms and manufacturers.
Historically high savings and low interest rates drove record growth in home sales and prices during the pandemic, but this year has brought forth a stark turnaround after the Federal Reserve started raising interest rates in March. On Tuesday, Fitch Ratings released a note warning that the likelihood of a severe downturn in U.S. housing has climbed as homes have become increasingly unaffordable for most Americans. The firm predicts only a “moderate pullback” in the housing market, but it also acknowledged that housing activity could fall roughly 30% or more over a multi-year period in a worst-case scenario.
“Combined with downturns in tech, big-box retail, manufacturing and foreign economies, a bona fide recession looks more likely than not over the next year,” says Adams.
The economy unexpectedly shrank for a second consecutive quarter in the three months ending in June, according to the Bureau of Labor Statistics. In its report, the government partly blamed the worse-than-expected GDP figure on declines in residential investments (or home buying).