Mortgage applications remained largely unchanged last week, as affordability constraints continue to shape borrower behavior, according to the Mortgage Bankers Association (MBA). However, beneath the surface of that stability, a notable trend is emerging: increasing interest in both FHA loans and adjustable-rate mortgages (ARMs).
Bob Broeksmit, president and CEO of the MBA, noted that ARM applications rose to a seven-week high, “reflecting buyers’ efforts to manage monthly payments amid the current interest rate and home price environment.” This shift comes as potential homebuyers grapple with rates that, while easing slightly, remain significantly elevated compared to recent years.
The broader housing market continues to navigate a complex landscape. Existing home sales in January experienced a decline, falling 8.4% from December to an annualized rate of 3.91 million homes, and down 4.4% year-over-year, according to the National Association of Realtors (NAR). While severe winter weather, particularly Winter Storm Fern, played a role in the downturn, underlying factors suggest a more persistent challenge.
Lisa Sturtevant, chief economist at Bright MLS, explained that the January sales figures largely reflect contracts signed in December, a period characterized by cautious buyer behavior. “Many buyers stayed on the sidelines, waiting not just for lower rates but also rate stability,” she said. Despite this hesitancy, Sturtevant anticipates more favorable conditions as the spring homebuying season approaches, including increased inventory, slower home price appreciation, and greater rate stability.
The economic data offers a mixed picture. The Consumer Price Index (CPI) for January showed an improvement in the annual inflation rate, rising 2.4% – down from 2.7% in December. Shelter costs, a significant component of the CPI, increased 0.2% for the month and 3% year-over-year. This cooling inflation provides some optimism for potential interest rate cuts later in the year.
Sam Williamson, senior economist for First American, cautioned that the Federal Reserve will likely remain “cautious as they watch whether tariff-related cost pressures feed through more broadly into prices.” However, he added that the cooling inflation is “another incremental tailwind heading into the spring,” potentially leading to modestly lower mortgage rates even before any policy moves by the Fed. This, combined with slower home price growth and rising incomes, could stimulate demand as the peak buying season begins.
The market’s expectations for Federal Reserve action are evolving. Following three consecutive rate cuts in December, officials have signaled a more measured approach to further easing. The CME Group’s FedWatch tool currently indicates a mere 10% probability of a rate cut at the March 18 meeting, a significant decrease from the 21% seen a month earlier. However, expectations for cuts later in the year are stronger, with 25% anticipating a 25-basis-point cut in late April and 50% expecting one by mid-June.
Adding another layer of complexity, ongoing tensions between the Trump administration and the Federal Reserve could influence mortgage rate direction. The Supreme Court is expected to rule on the president’s attempt to fire Federal Reserve Governor Lisa Cook in the coming months. Simultaneously, some lawmakers have indicated they will withhold support for Kevin Warsh’s nomination as the next Fed chair unless the administration drops an investigation into current chair Jerome Powell.
Governor Cook, who retains a voting role on interest rates in 2026, recently emphasized the importance of maintaining the Fed’s credibility in controlling inflation. Speaking in Miami, she stated that the commitment to returning to the 2% annual inflation target was crucial in anchoring inflation expectations and enabling the disinflation observed from 2022 through 2024. “If we were to lose credibility, the cost may not be immediately felt, but it would be resoundingly and painfully felt when we need it the most, in an inflation crisis such as the one we experienced three years ago,” she warned.
The rise in ARM popularity, coupled with increased FHA loan applications, underscores the challenges facing potential homebuyers. ARMs offer lower initial rates than fixed-rate mortgages – currently almost a percentage point lower, according to MBA data – but carry the risk of rate adjustments after a fixed introductory period. The typical 5/1 ARM currently has an interest rate in the mid-5% range, compared to 30-year fixed rates of 6.3% and above. This difference can translate into significant monthly savings, but also introduces uncertainty as rates could rise if the Federal Reserve does not cut rates as anticipated.
The current environment echoes concerns from the mid-2000s, when adjustable-rate loans contributed to the financial crisis. However, regulators have implemented changes since then aimed at mitigating the risks associated with ARMs. Whether these safeguards will be sufficient to prevent a repeat of past mistakes remains to be seen, but the resurgence of ARMs warrants close monitoring as the spring homebuying season unfolds.
