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Mortgage Applications Dip in May amid Refinance Slowdown

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Mortgage loan applications declined in May, driven by a drop for refinancing activity. According to the Mortgage Bankers Association (MBA) weekly survey, the Market Composite Index, which measures mortgage application volume, fell 5.5% month-over-month on a seasonally adjusted (SA) basis. Despite the monthly dip, application volume remains 23.7% higher than in May 2024.

The average 30-year fixed mortgage rate rose for the second consecutive month, climbing 10 basis points to 6.9%. Purchase activity remained resilient, posting a modest 1.3% monthly gain from the previous month, while the Refinance Index declined 13.7% (SA). Compared to a year ago, mortgage rates are still 18 basis points lower, with purchase and refinance applications up 15.8% and 39.8%, respectively.

Average loan sizes also declined. In May, the average loan amount for the overall market, which includes purchases and refinances, declined 3.1% to $390,800. Purchase loan sizes stayed flat at $443,600, while refinance loan sizes dropped 12.8% to $296,000. The average size for adjustable-rate mortgages (ARMs) ticked up 0.5%, from $1.05 million to $1.06 million.

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Treasury Yield Increase Drives Mortgage Rates Higher in May

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Mortgage rates continued their upward trend in May due to market volatility triggered by fiscal concerns and weaker U.S. Treasury demand. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.82% — a 9-basis-point (bps) increase from April. The 15-year fixed-rate mortgage increased by 5 bps to 5.95%.

The 10-year Treasury yield, a benchmark for mortgage rates, averaged 4.38% in May, with the most recent weekly yield surpassing 4.50%. Long-term treasury yields spiked following two events: first, a credit rating downgrade by Moody’s Ratings, and then, a tepid auction of the 20-year treasury. The weak demand for long-term government bonds necessitated a higher yield to attract investors.

At the core of the market unease is concern over the growing fiscal deficit that intensified as the new “One Big Beautiful Bill” threatens to further widen the federal deficit, which stood at $1.9 trillion as of January 2025. The combination of weakening fiscal credibility and poor auction performance suggests a possible upward repricing of long-term borrowing costs.

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Cost of Credit Eases for Builders and Developers

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The cost of credit for residential Land Acquisition, Development & Construction (AD&C) eased in the first quarter of 2025, according to NAHB’s survey on AD&C Financing. During the quarter, the average contract interest rate declined on three of the four categories of loans tracked in the NAHB survey: from 8.48% in 2024 Q4 to 8.23% on loans for land acquisition, from 8.28% to 7.86% on loans for land development, and from 8.34% to 8.08% on loans for speculative single-family construction. The average rate on loans for pre-sold single-family construction meanwhile bucked the trend, increasing from 7.75% to 7.96%.

In addition to interest, lenders also typically charge initial points on the loans. The points can affect credit costs as much as the interest rate—especially for loans paid off as quickly as most of those for single-family construction. In the first quarter of 2025, average points declined from 0.75% to 0.74% on loans for land development, and from 0.67% to 0.45% on loans for pre-sold single-family construction; but increased from 0.55% to 0.71% on loans for land acquisition, and from 0.64% to 0.68% on loans for speculative single-family construction.

The change in points was sufficient to offset the increase in interest rates on loans for pre-sold single-family construction, but not the reduction in rates on the other three categories of AD&C loans. As a result, the average effective interest rate (calculated taking both the contract rate and initial points into account) declined in all four cases: from 10.79% to 10.68% on loans for land acquisition, from 12.12% to 11.50% on loans for land development, from 12.86% to 12.59% on loans for speculative single-family construction, and from 12.98% to 12.49% on loans for pre-sold single-family construction.

Except for what now looks like a temporary reversal for construction loans in 2024 Q4, the average effective rate on AD&C loans has been trending downward for about a year. This stands in contrast to the average rate on 30-year fixed-rate mortgages, which has levelled off and even started to edge up again after coming off its 2023 peak.

While the cost of AD&C credit was declining, the NAHB survey shows that lending standards on AD&C loans were still tightening in the first quarter, although the reports of tightening were less widespread than they had been at any other time over the past three years. The net easing index derived from the survey posted a 2025 Q1 reading of -10.0 (the negative numbers indicating that net credit had become tighter since the previous quarter). This is the closest the NAHB index has come to hitting the break-even point of zero since the first quarter of 2022.

At the same time, the similar net easing index derived from the Federal Reserve’s survey of senior loan officers posted a 2025 Q1 reading of -11.1. This is down slightly from the previous quarter, but still ranks as the second highest reading for the Fed index since the first quarter of 2022. The Fed survey of lenders and the NAHB survey of builders and developers have been telling very similar stories recently, especially over the past five quarters. More details from the Fed’s survey of lenders—including measures of demand and net easing for residential mortgages—are discussed in a previous post.

Perhaps surprisingly, given the above results on declining credit costs, raising interest rates (cited by 57% of builders and developers who reported that availability of credit had worsened in the first quarter) has displaced lowering the loan-to-value or loan-to-cost ratio (50%) as the number-one way NAHB members say lenders are tightening conditions on AD&C loans. It is important to remember that relatively few NAHB members reported worse credit availability in the first place in 2025 Q1, so these percentages are based on a relatively small sample. Tied for third place, each cited by 43% of builders and developers, are increasing documentation requirements and requiring personal guarantees or collateral not related to the project. Meanwhile, the share of builders and developers who say lenders are reducing the amount they are willing to lend fell to 36%—the lowest percentage for this mode of tightening since 2018.

More detail on credit conditions for residential builders and developers is available on NAHB’s AD&C Financing Survey web page.

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Residential Mortgages Experience Weaker Demand in First Quarter

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Overall demand for residential mortgages was weaker while lending standards for most types of residential mortgages were essentially unchanged according to the Federal Reserve Board’s April 2025 Senior Loan Officer Opinion Survey (SLOOS).  For commercial real estate (CRE) loans, lending standards for construction & development were moderately tighter, while demand was modestly weaker.  However, for multifamily loans within the CRE category, lending conditions and demand were essentially unchanged for the second consecutive quarter. 

The Federal Reserve left its monetary policy stance (i.e., Federal Funds rate) unchanged during its most recent meeting stating that the Fed “is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen.”  Nevertheless, NAHB is maintaining its forecast for interest rate cuts in the second half of 2025.

Residential Mortgages

In the first quarter of 2025, only one of seven residential mortgage loan categories saw a slight easing in lending conditions, as evidenced by a positive value for GSE-eligible loans, which was +3.2 in the first quarter of 2025.  Subprime and government loans both recorded a neutral net easing index (i.e., 0) while the other four categories (Non-QM jumbo; Non-QM non-jumbo; QM non-jumbo, non-GSE-eligible; QM jumbo) were negative, representing tightening conditions.  The Federal Reserve classifies any net easing index between -5 and +5 as “essentially unchanged,” however.  By this definition, lending standards changed significantly for only one category of residential mortgages: non-QM jumbo (-7.5).

All residential mortgage loan categories reported significantly weaker demand in the first quarter of 2025, except for QM-jumbo which was essentially unchanged.  The net percentage of banks reporting stronger demand for most of the residential mortgage loan categories has been negative since mid-2022.

Commercial Real Estate (CRE) Loans

Across CRE loan categories, construction & development loans recorded a net easing index of -11.1 for the first quarter of 2025, indicating tightening of credit conditions.  For multifamily loans, the net easing index was -1.6, or essentially unchanged. Both categories of  CRE loans show at least three consecutive years of tightening lending conditions (i.e., net easing indexes below zero).  However, the tightening has become less pronounced recently—especially for multifamily, with its net easing index rising (i.e., becoming less negative) for six straight quarters.

The net percentage of banks reporting stronger demand was -6.3% for construction & development loans and -1.6% for multifamily loans, the negative numbers indicating weakening demand.  Like the trend for lending conditions, demand for CRE loans has become less negative recently, especially for multifamily loans  where the net percentage of banks reporting stronger demand has risen (i.e., become less negative) for six consecutive quarters.

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Consumer Credit Slows in the First Quarter of 2025

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Consumer credit continued to rise in early 2025, but the pace of growth has slowed. Student loan balances rose year-over-year as borrowers resumed payments following the end of pandemic-era relief. However, growth remains modest. Credit card and auto loan debt also increased, though both experienced their slowest annual growth rates in years. Despite historically high interest rates, credit card and auto loan rates have begun to ease slightly, providing some relief for consumers facing elevated borrowing costs.

Total outstanding U.S. consumer credit reached $5.01 trillion for the first quarter of 2025, according to the Federal Reserve’s G.19 Consumer Credit Report. This is an increase of 1.53% at a seasonally adjusted annual rate (SAAR) compared to the previous quarter, and a 1.93% increase compared to last year. Both rates have slowed from the previous quarter.

Nonrevolving Credit

Nonrevolving credit, largely driven by student and auto loans (the G.19 report excludes mortgage loans), reached $3.68 trillion (SA) in the first quarter of 2025. This marks a 1.23% increase (SAAR) from the previous quarter, and a 1.56% increase from last year.

Student loan debt balances stood at $1.80 trillion (NSA) for the first quarter of 2025, marking a 2.48% increase from a year ago. The end of the COVID-19 Emergency Relief—which allowed 0% interest and halted payments until September 1, 2023—led year-over-year growth to decline for four consecutive quarters, from Q3 2023 through Q2 2024, as borrowers resumed payments and took on less new debt. While the past three quarters have shown a return to growth, the current pace of growth remains below pre-pandemic levels.

Auto loans reached a level of $1.56 trillion (NSA), showing a year-over-year increase of only 0.26%, marking the slowest growth rate since 2010. The deceleration in growth can be attributed to several factors, including stricter lending standards, elevated interest rates, and overall inflation. Auto loan rates for a 60-month new car stood at 8.04% (NSA) for the first quarter of 2025, a historically elevated level. However, auto rates have slowed modestly, decreasing by 0.18 percentage points compared to a year ago.

Revolving Credit

Revolving credit, primarily made up of credit card debt, rose to $1.32 trillion (SA) in the first quarter of 2025. This represents a 2.36% increase (SAAR) from the previous quarter and a 2.98% increase year-over-year. Both measures reflect a notable slowdown, marking the weakest growth in revolving credit in several years. This deceleration comes as credit card interest rates remain elevated, with the average rate held by commercial banks (NSA) at 21.37%. Although rates have hovered near historic highs since Q4 2022, the past two quarters have shown modest year-over-year declines, reflecting the impact of rate cuts that began in 2024.

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Mortgage Activity Levels Off in April as Rates Increase

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Mortgage loan applications saw little change in April, as refinancing activity decreased. The Market Composite Index, which measures mortgage loan application volume based on the Mortgage Bankers Association (MBA) weekly survey, experienced a 0.4% month-over month increase on a seasonally adjusted (SA) basis. However, year-over-year, the index is up 29.3% compared to April 2024.

The average rate for a 30-year fixed mortgage climbed 10 basis points in April, reaching 6.8%, according to the MBA survey. As rates edged higher, purchase activity posted a modest 1.9% month-over-month gain (SA), while the Refinance Index declined by 1.4% (SA). Compared to a year ago, mortgage rates are down 37 bps, and thus, purchase applications are higher by 11.2%, while refinance activity has jumped 62.0%.

Loan sizes remained relatively stable. In April, the average loan size across the total market (including purchases and refinances) held steady at $403,500, month-over-month, on a non-seasonally adjusted basis (NSA). Purchase loans sizes edged down 1.3% to $444,000, while refinance loan sizes increased 0.5% to $339,300. Notably, the average loan size for adjustable-rate mortgages (ARMs) fell 7.8%, from $1.14 million to $1.05 million.

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Personal Income Rises 0.5% in March

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Personal income increased by 0.5% in March, following a 0.7% rise in February and a 0.6% gain in January, according to the latest data from the Bureau of Economic Analysis. The gains in personal income were largely driven by higher wages and salaries. However, the pace of personal income growth slowed from its peak monthly gain of 1.4% in January 2024.

Real disposable income, the amount remaining after adjusted for taxes and inflation, inched up 0.5% in March, following a 0.4% increase in February and 0.2% gain in January. On a year-over-year basis, real (inflation-adjusted) disposable income rose 1.7%, down from a 6.5% year-over-year peak recorded in June 2023. No adjustments were made to personal income for the federal employees’ deferred resignation program in March, as participants are still considered as employed and continue to receive compensations until their official separation from the federal government.

Meanwhile, personal consumption expenditures rose 0.7% in March, building on a 0.5% increase in February. Real spending, adjusted to remove inflation, increased 0.7% in March, with expenditures on goods climbing 1.3% and spending on services up 0.4%.

As spending outpaced personal income growth, the personal savings rate dipped to 3.9% in March. With inflation eroding compensation gains, people are dipping into savings to support spending. This trend will ultimately lead to a slowing of consumer spending.

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April Mortgage Rates Edge Up Following Treasury Sell-Off

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Mortgage rates edged up slightly in April, with the average 30-year fixed-rate mortgage settling at 6.73%, according to Freddie Mac. This marks an 8-basis-point (bps) increase from March. The 15-year fixed-rate mortgage increased by 7 bps to 5.90%.

The uptick in mortgage rates followed a sell-off in U.S. Treasury securities, driven by concerns surrounding the ongoing trade war. As demand for Treasuries declined, prices fell and yields rose. The 10-year Treasury yield averaged 4.28% in April, with the most recent weekly yield rising to 4.34%. The sell-off signals a potential loss of investor confidence in what is typically considered a safe-haven asset.

In response to rising yields, the president has pressured Federal Reserve Chair Jerome Powell to cut interest rates. However, at the recent Economic Club of Chicago, Chairman Powell stated that “tariffs are highly likely to generate at least a temporary rise in inflation” and emphasized the Fed’s obligation to price stability, adding that it must ensure “a one-time increase in the price level does not become an ongoing inflation problem”.

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Refinancing Continues to Drive Mortgage Activity in March

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The Market Composite Index, which measures mortgage loan application volume based on the Mortgage Bankers Association (MBA) weekly survey, rose 14.0% month-over-month on a seasonally adjusted (SA) basis, driven primarily by a surge in refinancing activity. Year-over-year, the index is up 29.2% compared to March 2024.

The Purchase Index rebounded 8.3% (SA) from the previous month as mortgage rates declined. Meanwhile, the Refinance Index surged 22.2% (SA), continuing its strong upward trend. Compared to a year ago, purchase applications are up 7.6%, while refinance activity has jumped 72.9%.

Economic uncertainty continues to drive treasury yield volatility, impacting mortgage rates. In March, the average 30-year fixed-rate mortgage reported in the MBA survey fell 17 basis points (bps) to 6.7%, marking a 23 bps decline from a year ago.

Loan sizes have continued to rise since the start of the year. In March, the average loan size across the total market (including purchases and refinances) increased 3.5% month-over-month (NSA) to $403,300. For purchase loans, the average size edged up 0.9% to $450,000, while refinance loans saw a sharper increase of 10.4%, reaching $337,500. Meanwhile, the average loan size for adjustable-rate mortgages (ARMs) rose slightly by 1.1%, from $1.13 million to $1.14 million.

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Mortgage Rates Hold Steady After Early March Drop

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Mortgage rates dropped significantly at the start of March before stabilizing, with the average 30-year fixed-rate mortgage settling at 6.65%, according to Freddie Mac. This marks a 19-basis-point (bps) decline from February. Meanwhile, the 15-year fixed-rate mortgage fell by 20 bps to 5.83%.

The drop in long-term borrowing costs was driven by a 24-bps decline in the 10-year Treasury yield, which averaged 4.28% in March. This decline provided a boost to the housing market—new home sales increased 5.1% year-over-year in February, while the participation of first-time homebuyer of existing homes rose 26% over the same period. However, existing home sales saw a slight dip from last February.

The decrease in Treasury yields reflects growing concerns about an economic slowdown, particularly as shifts in tariff policy weaken consumer confidence. Despite this, the labor market remained resilient in February, posting steady job gains even as the unemployment rate ticked up slightly. The strength of upcoming jobs reports will be critical in assessing whether recession risks are intensifying.

At the latest FOMC meeting, the Federal Reserve held interest rates steady but revised its 2025 economic projections: expected GDP growth was lowered to 1.7% (down from 2.1% in December 2024) and the projected unemployment rate was raised to 4.4%, up 0.1 percentage point from previous estimates.

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