Americans are trying to change their mortgages

Homeowners moved to refinance their properties in the week ending May 17, Mortgage Bankers Association reported—at a time when mortgage rates have been trending downward, providing an opening for homeowners to reduce their monthly home loan payments.

Refinancing activity went up 7 percent in the period and was 21 percent higher than at the same time a year ago, MBA’s Refinance Index showed. Overall, mortgage applications increased by almost 2 percent, the data showed.

The market saw the 30-year fixed rate mortgage tick down to 7.01 percent, compared to 7.08 percent the week before, potentially helping to spur activity in the refinance space.

The Context

Elevated mortgage rates have been a key shaper of activity in the housing market over the past few years. After hitting the highest levels since the beginning of the century, the borrowing costs for home loans dropped in December, but they have since ticked up to above 7 percent.

The rise in mortgage rates is related in part to high inflation, which prompted the Federal Reserve to hike borrowing costs starting in March 2022. Inflation has slowed, but it remains higher than the 2 percent policymakers would like it to be.

When evidence suggests inflation is trending toward that target, mortgage rates have fallen as the market’s expectation for a Federal Reserve rate cut rises. A recent inflation reading from the Consumer Price Index showed a slight decline, which in turn contributed to a fall in mortgage rates over the past few weeks.

But elevated inflation has nevertheless contributed to a lukewarm housing market this spring, a time typically active for buyers and sellers. MBA’s seasonally adjusted Purchase Index dropped 1 percent, while the unadjusted metric fell 2 percent—placing it 11 percent lower than it was at the same time in 2023.

Views

Joel Kan, MBA’s deputy chief economist, suggested that a decline in rates for the week ending May 17 had a hand in encouraging homeowners to refinance their home loans.

“The 30-year fixed mortgage rate declined for the third straight week, dropping to 7.01 percent—the lowest level in seven weeks,” he said in a statement shared with Newsweek. “Rates coming down from recent highs spurred some borrowers to act, with increases across both conventional and government refinance applications.”

Refinancing for Veterans Affairs mortgages also showed an improvement with “a double-digit increase for the third consecutive week, although the current level of refinancing is still well below its historical average,” Kan added.

New mortgage purchases remained low, he continued.

“Purchase activity continues to lag despite this recent decline in rates, down 11 percent from a year ago, as potential buyers still face limited for-sale inventory and high list prices,” Kan said.

What’s Next

The trajectory of mortgage rates in the U.S. is tied with the fate of inflation, experts say. If price increases trend downward, it could build up expectations of a Federal Reserve reduction in borrowing costs, which would help bring mortgage prices down.

The Fed’s policymakers are set to meet to decide on rates in June.