Mortgage Applications Flat, ARM Interest Rises as Inflation Cools & Fed Rate Cut Odds Diminish
The U.S. Housing market continues to navigate affordability challenges, with potential buyers increasingly turning to different mortgage products and facing uncertainty around future interest rate adjustments. Mortgage applications remained largely unchanged last week, according to the Mortgage Bankers Association (MBA), as ongoing pressures shape borrower behavior.
Shifting Mortgage Landscape
Bob Broeksmit, president and CEO of the MBA, noted a rise in applications for FHA and adjustable-rate mortgages (ARM). ARM applications specifically reached a seven-week high, indicating buyers are seeking ways to manage monthly payments in the current environment of elevated interest rates and home prices.
Existing home sales experienced a decline in January, impacted by severe winter weather, particularly Winter Storm Fern. The National Association of Realtors (NAR) reported an annualized sales rate of 3.91 million homes, representing an 8.4% decrease from December and a 4.4% decline from January 2025.
However, Bright MLS chief economist Lisa Sturtevant suggests that the January numbers reflect conditions encountered in December, as pending sales were already slow even with dropping mortgage rates. She anticipates more favorable conditions in the spring, including increased listings, slower home-price appreciation, and more stable mortgage rates, though market conditions will vary regionally.
Inflation and the Federal Reserve
January’s Consumer Price Index (CPI) data showed some improvement, with the annual inflation rate rising 2.4%, down from 2.7% in December. Shelter-driven inflation increased 0.2% during the month and 3% for the year.
Sam Williamson, senior economist for First American, believes the inflation reading will likely keep Federal Reserve policymakers cautious as they monitor potential tariff-related cost pressures. However, progress toward the central bank’s 2% annual target opens the door for potential interest rate cuts in 2026.
What’s Next for Interest Rates?
The Federal Reserve lowered rates for a third consecutive time in December, but signaled a more measured approach to future cuts. According to the CME Group’s FedWatch tool, a rate cut in March is becoming less probable. However, the odds increase later in the year, with 25% anticipating a cut in late April and 50% expecting one by mid-June. A reduction to a range of 3.25% to 3.5% would be the lowest since September 2022.
Political factors could also influence mortgage rates. The Supreme Court is expected to rule on the president’s attempt to fire Lisa Cook, a current voting member of the Federal Reserve. Some lawmakers have indicated they may not support the nomination of Kevin Warsh as the next Fed chair unless an investigation into current chair Jerome Powell is dropped.
Frequently Asked Questions
What is driving the increase in ARM applications?
ARM applications rose to a seven-week high, reflecting buyers’ efforts to manage monthly payments amid the current interest rate and home price environment.
How did winter weather impact home sales in January?
Existing home sales in January were negatively impacted by severe winter weather, resulting in an annualized sales rate of 3.91 million homes, an 8.4% decline from December.
What is the current outlook for Federal Reserve rate cuts?
The likelihood of a rate cut in March is shrinking, with only 10% of traders expecting a cut. However, there is a 50% expectation of a cut by mid-June.
As the spring homebuying season approaches, will shifting economic factors and potential rate adjustments create more opportunities for prospective homebuyers?