Demand for U.S. home loan refinancings plummeted last week as mortgage rates climbed to their highest levels of the year, an industry group said on Wednesday, but economists say rates are still low enough to spur home buying.
The Mortgage Bankers Association said on Wednesday its measure of demand for mortgage refinancings, the refinancing index, fell 13.2 percent to 2,184.6 in the week ended May 7.
That drop in demand for loan refinancings came as average interest rates on 30-year mortgages rose 22 basis points to 6.32 percent, the highest level of the year.
But the group's purchase index, a gauge of requests for loans to buy homes, rose by 2.4 percent to 494.3 from 482.5 in the prior week.
"Everyone knows rates are going to go up and everyone is trying to get the best deal now," said Drew Matus, senior financial economist at Lehman Brothers.
"People are more aware of what rates are doing and what the Federal Reserve is doing than ever in the past. People who were thinking about buying homes are moving quickly so they can avoid the imminent rate hike," said Chris Low, chief economist at FTN Financial in New York.
A string of strong reports on the economy -- most notably April's employment data -- as well as hints by Federal Reserve officials have bolstered expectations that the U.S. central bank will raise interest rates, possibly as soon as June.
"We'll continue to see a gradual fall-off in the refinance share of new applications. Rates are moving higher," Frank Nothaft, chief economist at Freddie Mac, said on Tuesday ahead of the MBA report's publication.
With rates continuing their climb higher this week, Nothaft said, "I expect we'll see even more of a dip in refis."
And, looking ahead, Freddie Mac's chief economist believes refinancings will account for a mere one-third of all loan applications, down from as much as just over 75 percent at the height of the refinance boon when rates hit historic lows.
"That is well below what it has been for the last three years," Nothaft said of the drop in the refinance share of all home loan applications.
The MBA's market index, a measure of overall lending activity, fell 5 percent to 742.2 and the group's purchase index, a gauge of requests for loans to buy homes, rose by 2.4 percent to 494.3 from 482.5 in the prior week.
The latest week's purchase index level is the second highest for the year. This measure hit a level of 501.6 in the Jan 9 week.
The latest rise in mortgage rates is sure to slow some home buying later this year, but economists don't expect the ebb in demand to be a notable.
"At the margin we'll see some decline in aggregate home purchase activity. We're still expecting spring to be a robust home buying market. Mortgage rates, even though they are higher, are still at near-historic lows," said Nothaft, adding that a recent employment report showing gains in U.S. jobs market in April is also reason for cheer in housing.
"Strong employment growth means family incomes will rise and this will support home purchasing," said Nothaft.