In a dramatic shift, the demand for mortgage applications plummeted by 6% last week, reaching its lowest point since 1995, according to the recent Mortgage Bankers Association (MBA) survey conducted for the week ending on September 29th.

The slump in applications comes hand in hand with a surge in average rates for the standard 30-year loan, which climbed from 7.41% to 7.53% in a single week, marking the highest level observed since December 2000.

The decline in mortgage applications, while anticipated, is a clear reflection of the surge in borrowing costs that have led potential homebuyers to either hold off on their plans or seek alternatives to alleviate the financial strain.

For instance, adjustable-rate mortgages (ARMs), known for their comparatively lower interest rates, have been gaining traction, especially since 30-year rates have firmly exceeded the 7% mark.

Joel Kan, MBA’s chief economist, noted, “The purchase market slowed to the lowest level of activity since 1995, as the rapid rise in rates pushed an increasing number of potential homebuyers out of the market.

” This is evident from the data, where overall purchase demand stands at a staggering 22% lower than the same week a year ago, hitting a nadir not witnessed since 1996. Kan further stated, “Mortgage applications ground to a halt.”

However, amid the slowdown, there were a few glimmers of hope. The share of Federal Housing Administration (FHA) loan applications showed a slight uptick, rising from 14.1% to 14.5% from the previous week.

FHA loans tend to be an attractive choice for entry-level buyers seeking competitive rates or a lower down payment requirement to qualify.

On the flip side, applications backed by the US Department of Veterans Affairs (VA) saw a dip, dropping from 10.9% to 10.1% compared to the previous week.

Meanwhile, USDA loan applications remained constant at 0.5%. The MBA also highlighted a noticeable increase in ARMs, signifying that buyers are eager to seek any relief they can from the escalating rates.

Specifically, the average contract rate for 5/1 ARMs stood at 6.49% for the week ending on September 29th, a notable contrast to the 7.53% rate for the typical 30-year fixed conventional loan.

Overall, market activity has remained subdued as potential buyers, still in the market, grapple with various challenges such as limited inventory and persistently high home prices.

Beatrice de Jong, a real estate broker at The Beverly Hills Estates, remarked, “Rates were the highest of the year,” further emphasizing that fewer buyers are actively searching for homes, leading to reduced competition in the real estate market.

In the broader context, new home sales experienced a significant decline in August, while pending home sales and closed sales of previously owned homes also witnessed a downturn last month, hitting a seven-month low.

Despite these challenges, an encouraging sign for prospective buyers is the gradual increase in inventory levels, suggesting a potential positive outlook for those still on the lookout for their ideal homes.