Higher mortgage rates caused by the debt ceiling drama and resilient inflation reduced demand for home loans last week, affecting the already depressed refinancings in particular, according to the latest Mortgage Bankers Association (MBA) data. 

The trade group’s market composite Index declined 3.7% on a seasonally adjusted basis for the week ending May 26 compared to one week earlier. The survey, conducted weekly since 1990, covers over 75% of all U.S. retail residential mortgage applications. 

On the one hand, the federal government debt limit impasse brought volatility to markets last week, increasing mortgage rates to their highest level in six months – but President Joe Biden and House Speaker Kevin McCarthy struck a deal on Saturday. On the other hand, stubborn inflation is reducing the bets on a rate cut at the Federal Reserve’s next meeting, which is slated for June 13 and 14.  

“Inflation is still running too high, and recent economic data is beginning to convince investors that the Federal Reserve will not be cutting rates anytime soon,” Mike Fratantoni, the MBA’s senior vice president and chief economist, said in a statement. “Mortgage rates for conforming balance 30-year loans were being quoted above 7% by some lenders last week, and the weekly average at 6.9% reached the highest level since last November.” 

The MBA data shows the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) reached 6.91% last week, up compared to 6.69% the prior week. Rates for jumbo loans (greater than $726,200) increased to 6.78% from 6.57%. 

The decline was more robust among refinancing applicants. The refinance index fell 7% last week from the previous week and dropped 45% from the same week one year ago. Refi loans represented 26.7% of the total applications last week compared to 27.4% the previous week, the MBA data shows. 

Meanwhile, the seasonally adjusted purchase index decreased by 3% from one week earlier and was 31% lower than the same week one year ago. 

“Application volumes for both purchase and refinance loans decreased last week due to these higher rates,” Fratantoni said. “While refinance demand is almost entirely driven by the level of rates, purchase volume continues to be constrained by the lack of homes on the market.”

Regarding loan types, the adjustable-rate mortgage (ARM) share of mortgage apps increased to 6.8% of total applications last week from 6.7% in the previous week, according to the MBA data. 

The Federal Housing Administration share rose to 12.7% last week from 12.5% the week prior, while the U.S. Department of Veteran Affairs loans share fell to 12.1% from 12.5% in the same period. The U.S. Department of Agriculture loans held steady at 0.5%.