Applications for home purchase loans dropped by 18 percent in the month of November according to a report released by the Mortgage Bankers Association (MBA).
Home purchase loans fell for four consecutive weeks in the month of November. It is not clear yet if this trend will likely continue into the New Year.
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Why Mortgage Applications Have Fallen
A major reason that home purchase activity has slowed down in recent weeks is that interest rates have been rising. A higher interest rate means that the borrower of a loan will have to pay more back to the bank in interest. Even small adjustments in interest rates can lead to big changes in how affordable a home loan can be over a thirty-year period.
Another important factor that pushed home purchases down was the shutdown of the federal government in October. No new home applications from the FHA were processed during the 16 day government shutdown because the underwriters for the loans were furloughed.
But the shutdown didn’t just have an immediate impact on American’s ability to purchase a home. It weakened the confidence that many people had in a sustainable recovery.
“The uncertainty created by the government shutdown and debt ceiling battle in October left Americans more worried about the economy than they have been all year,” Ellen Haberle, economist at online real estate-broker Redfin, said. “It is no surprise that many buyers put their home-buying plans on hold that month.”
What the Future Holds for New Home Purchases
There is still much room for hope that home sales will begin to pick up once again going into the New Year. But there are still many questions that remain unanswered. It still remains unknown what effect a prolonged period of heightened interest rates could have on the housing market.
One of the key difficulties behind the decline in home sales is showing tangible signs of improving. The partisan brinksmanship that brought the federal government near the verge of default has subsided in recent weeks. In fact, a new bipartisan budget bill which would fund the government for the next two years passed the republican controlled house with 334 votes.
There are good signs that it will pass the senate and could be signed into law soon. If this were to happen, it would help to create a greater sense of stability in Washington which would definitely have implications on the financial markets.
Another reason to be optimistic that home purchase sales could pick up again is that the Federal Reserve doesn’t seem ready to end it support. Policy makers at the Fed have discussed and seem poised to adopt a long term policy of quantitative easing. This will potentially help keep interest rates low or prevent them from rising more quickly.
Because job reports over the past several months haven’t been all that spectacular, the Fed still seems reluctant to begin to withdrawal support just yet. It has been their stated goal to tie a withdrawal of their support with sustained growth from the labor market. And that simply hasn’t happened.
Looking toward the future, if you are purchasing a new home you should speak with a lender. There are many home loan lenders to choose from but finding one that is knowledgeable and helpful will serve you best with the many changes to mortgage laws and regulations.
