Real Estate Woes: High Interest Rates are Cutting Mortgage Applications

Mark Hake


The Mortgage Banker's Association (MBA) reported on April 14 that mortgage applications for new home purchases fell. They declined by 5% from a year ago in March and by 10% from February 2022, a month earlier.

This is a direct result of higher interest rates. The average rate for 30-year mortgages increased to 5.13%, according to CNBC. This is up from 4.90% for conforming mortgage loans with 20% down. The increase over the 5% rate level is the highest since Nov. 2018.

Lower Mortgage Forecasts

As a result, MBA has now forecast lower new home sales for the fourth month in a row. In addition, MBA expects that there will be a 35.5% decrease this year in total mortgage originations in 2022.

In other words, people are not willing to buy as many homes at higher interest rates. This could eventually put a damper on home prices as the effects of supply and demand work out imbalances.

For example, The Wall Street Journal (WSJ) reported last week that there is a "growing sense of urgency to list properties before the market cools." The WSJ referred to a study by the Dallas Federal Reserve that the prices of homes were approaching a "bubble" level.

The decline in applications is proof that prices may soon be cooling off, according to Redfin chief economist Daryl Fairweather, says the WSJ.

Don't Write Off Real Estate Growth Just Yet

However, the MBA reports that home buyers are increasingly looking at new homes, given the lack of existing homes for sale.

In fact, the CEO of Tri Pointe Homes (TPH), Doug Bauer, told CNBC's Squawk on the Street on April 13 that housing is still in good shape long term. Despite interest rates rising over 200 basis points in all 10 states they operate in, they still see good demand for new homes. He said this is because there is limited supply of new homes, especially for the core Millennial home purchase group.

TPH stock trades on a forward price-to-earnings (P/E) of just 3.6 times, according to Yahoo! Finance. According to Morningstar, its average forward P/E over the past 5 years has been 8.6x. This shows that there is no extreme pessism in valuation of new home stocks like Tri Pointe Homes. This could make them a good purchase for value investors.

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This is not financial advice and you should not rely on my analysis to buy or sell any stock. I am not undertaking to induce you to buy or sell any securities.

I am relying on the “publisher’s exclusion” in the Investment Advisers Act of 1940 to provide this information without any personalized or individualized investment advice.

Mark Hake writes articles on InvestorPlace.com, Barchart.com, Medium.com, and Newsbreak.com on stocks and cryptos.

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Mark Hake is a financial analyst, investor, and Chartered Financial Analyst (CFA). He writes about US and foreign stocks as well as cryptos, hedge funds, and private equity. He previously ran his own hedge fund, investment research firm, and acted as CFO for a fintech startup. He focuses on finding value, arbitrage, and hidden asset opportunities.

Phoenix, AZ
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