Mortgage demand, a reliable barometer of the housing market's health, has taken a dramatic nosedive. As 2024 drew to a close, a sharp rise in interest rates pushed many potential buyers and refinancers to hit pause on their plans. According to the Mortgage Bankers Association (MBA), total mortgage application volume plummeted by 21.9% for the two weeks ending December 27, 2024.

However, this slump was not entirely unexpected. December is often a slow month for real estate, but this time, the downturn felt deeper. A bump in 30-year fixed-rate mortgage interest rates to 6.97%, up from 6.89%, caught many by surprise. The housing market, already on shaky ground due to lingering high prices and tight affordability, felt the sting of these changes more acutely.

Refinancing Took the Biggest Hit in the Outgoing Year

When it comes to mortgage demand, refinancing applications are always the first to react to rate changes. During these two weeks, refinance applications plummeted 36%. However, there is a silver lining: Refinance activity remained 10% higher than the same period last year -  although with rates hovering near 7%, even these borrowers are starting to hesitate, keeping refinance demand subdued moving into 2025.

Pixabay / Pexels / Although the inventory of homes on the market has grown compared to last year, many of those listings are stale.

Home Purchase Applications Are Struggling Too

Applications for mortgages to purchase homes also fell, declining 13% during the two-week holiday stretch. On an annual basis, the drop was even steeper - 17%. Seasonally adjusted numbers tell a story of buyers who are either priced out or spooked by high rates.

High prices and elevated rates have turned buyers cautious. Even sellers are reluctant, knowing they will likely face higher rates on their next mortgage. It is a standoff, and mortgage demand is caught in the middle.

Interest Rates Are Steering the Ship

The rise in mortgage rates toward the end of 2024 marked a turning point. After enjoying much of the year with rates lower than the previous year, the sudden increase in December sent shockwaves through the market.

Rates rose by 21 basis points compared to 2023 levels, a small number on paper but a significant difference for monthly budgets. Higher rates mean higher monthly payments, and that is a dealbreaker for many potential buyers. As rates hovered above 7% by year’s end, according to Mortgage News Daily, borrowers faced tough decisions about whether to move forward or wait for a better deal.

Seasonal Volatility or a Sign of Things to Come?

Photo / Pexels / If rates remain above 7%, many buyers may continue sitting on the sidelines, waiting for relief.

The holiday season often brings volatility to mortgage data. With midweek holidays and shifting schedules, it is not uncommon for numbers to fluctuate. However, experts caution against chalking this drop up to holiday irregularities alone.

Essentially, mortgage demand reflects broader trends.

High rates, combined with persistent affordability challenges, are likely to keep demand subdued even as we move into the traditionally busier spring season.

The Inventory Problem Adds Fuel to the Shrinking Mortgage Demand

Although more homes may be on the market now than last year, that doesn’t mean they are selling. Many properties have lingered for months without offers as potential buyers balk at the combination of steep prices and rising rates.

For sellers, the math doesn’t look great either. Those who locked in rates of 3% or 4% in years past are hesitant to list, knowing they would face much higher costs if they buy again. The result? A housing market stuck in limbo, with mortgage demand caught in the crossfire.