Adjustable-rate mortgage demand spiked last week. Here’s why.

The average rate on the 30-year fixed mortgage rose to the highest level since 2000 last week, but rates on adjustable-rate mortgages fell. That caused a run on these so-called ARMs, pushing total mortgage application volume very slightly higher, up 0.6% from the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) increased to 7.67% from 7.53%, for loans with a 20% down payment. But the average contract interest rate for 5/1 ARMs decreased to 6.33% from 6.49%.

ARMs usually offer much lower rates because they have shorter fixed terms. The difference between ARM rates and the 30-year fixed rate, however, has been unusually narrow recently. Last week, it widened.

“The level of ARM applications increased by 15% over the week, bringing the ARM share up to 9.2% of all applications, the highest share since November 2022,” wrote Joel Kan, MBA’s vice president and deputy chief economist, in a release. “The yield curve has become less inverted in recent weeks and ARM pricing has certainly improved.”

Applications to refinance a home loan inched up 0.3% from the previous week and were 9% lower than the same week one year ago.

Applications for a mortgage to purchase a home rose 1% for the week and were 19% lower than the same week one year ago.

“Application activity remains depressed and close to multi-decade lows, with purchase applications still almost 20% behind last year’s pace,” added Kan.

The average loan size is now at its lowest level since 2017. This indicates that most of the sales activity is happening at the lower end of the market. At the very high end, buyers tend to use all cash, and in the middle range affordability has been hit so hard that the market is essentially frozen.

At an open house in Washington, D.C., on Sunday, there were plenty of potential buyers looking, but most said that was all they were doing: just looking. The house was priced at $1.54 million.

“In this first two weeks of October, as anticipated, inventories have taken a jump, but then because interest rates have taken a jump too, we’re seeing less buyers. Lots of traffic, but not a lot of actual shoppers,” said Lisa Resch, a real estate agent with Compass who listed the home.