Purchase rate locks drop below pre-pandemic levels

July’s purchase rate lock activity fell to a low not seen since COVID-19 arrived in the United States, according to data from the Black Knight Optimal Blue product and pricing engine.

The rate at which homebuyers locked in their financing costs during the month was 11% slower than it was prior to the pandemic and down 28.5% from a year ago despite the fact that financing costs tracked by Black Knight were down 49 basis points from June.

“Although 30-year interest rates actually pulled back slightly in July, the originations market is still reacting to previous increases and continuing affordability challenges,” said Scott Happ, president of Black Knight division Optimal Blue, in a press release.

Homebuyers’ willingness to make a commitment to their loan rate is a key indicator for a market that’s become increasingly reliant on purchase mortgages since financing costs have risen from the record lows they plumbed during the pandemic.

Refinancing activity was down even more dramatically during the month with a 93.6% drop year-over-year. Rate locks for cash-out refis also fell, declining by 67.2% during the same period.

Consumers who locked in exceptionally low rates over the past couple of years have been reluctant to give them up in order to withdraw cash even though they’ve been under pressure to find new sources of funds due to high rates of inflation that wages have generally lagged.

Lenders may be relaxing their underwriting a little to attract some borrowers to the cash-out market. Cash-out borrowers’ average credit score during the month fell slightly to 692. That’s the lowest level seen since 2013, according to Black Knight’s Originations Market Monitor study.

July marks the fourth consecutive month of monthly declines in rate-lock activity, with the latest short-term drops breaking down as follows: total, 14.4%; rate-and-term refis, 16.9%; purchase, 14.3%; and 14.1% for cash-outs.

As Happ’s comment suggests, even with a little recent rate relief and a rise in weekly application volumes, affordability still appears to be cooling housing demand. The average purchase price of homes was down by 2.2% in July compared to the previous month.