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: Adjustable-rate mortgage applications rise to highest level since March 2008 — as house buyers bet on rates falling.

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The numbers: Mortgage applications fell 4.5% this week, as higher mortgage rates dragged down the housing sector.

Applications fell for the fourth month in a row, to the lowest level since 1997.

From builder sentiment to home sales, rates — which are a hair’s breadth away from 7% — have hit home buyers and homeowners looking to refinance.

Rates weighed down the market composite index, a measure of mortgage application volume, the Mortgage Bankers Association (MBA) said on Wednesday. 

The market index dropped 4.5% to 204.6 in the week ending October 14. A year ago, the index stood at 643.

But applications for adjustable-rate mortgages rose to the highest level since March 2008.

Adjustable-rate mortgages are typically fixed for five, seven, or 10 years — after which time the mortgage holder hopes they adjust to a lower rate. That is, they’re betting on rates eventually falling.

Key details: The refinance index plunged by 6.8%, and was down 86% compared to a year ago. 

The purchase index — which measures mortgage applications for the purchase of a home — fell by 3.7% from the previous week. 

The adjustable-rate mortgage share of activity rose to 12.8% applications, which is a significant increase. 

The average contract rate for the 30-year mortgage for homes sold for $647,200 or less was 6.94% for the week ending October 14. 

That’s up from 6.81% the week before, the MBA said.

For homes sold for over $647,200, the average rate for the 30-year was 6.31%. 

The 15-year dropped to 6.09%.

The rate for adjustable-rate mortgages rose to 5.65%. 

The big picture: With the 30-year almost a percent higher than an adjustable-rate mortgage, buyers are opting for the latter.

Though the share of adjustable-rate mortgages has risen to levels last seen in 2008 — which may trigger memories of the Great Recession for some — it’s still nowhere near its peak.

In 2004 and early 2005, adjustable-rate mortgages comprised a third of overall mortgage applications, according to MBA data.

Overall, mortgage applications, which give us an early read on the state of the housing market, tell us that the sector continues to take a beating as rates rise to the highest level in 20 years. 

“The speed and level to which rates have climbed this year have greatly reduced refinance activity and exacerbated existing affordability challenges in the purchase market,” Joel Kan, vice president and deputy chief economist at the MBA, said in a statement.

He added that housing activity from housing starts to home sales has been “on downward trends coinciding with the rise in rates.”

How that affects home buyers: With a $2,000 average monthly payment, you would’ve been able to afford roughly a $460,000 home a year ago with the 30-year at 3.23%, and with 20% down.

Now, with rates at 6.94%, a buyer would be able to only afford a home roughly worth $302,000. 

Market reaction: The yield on the 10-year Treasury note
TMUBMUSD10Y,
4.228%

rose above 4% in early morning trading.

Have any thoughts on the housing market? Write to MarketWatch reporter Aarthi Swaminathan at aarthi@marketwatch.com

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