Buyers taking out fewer mortgages, looking for cheaper homes 

As interest rates have climbed up, traditional mortgage products have taken a hit as consumers adjust their buying and borrowing plans.

In its latest report, real estate data company ATTOM found that 1.97 million mortgages were secured in the third quarter, a 47% drop compared to a year ago. It's the biggest annual drop in 21 years. The decrease is likely tied to high interest rates pushing many buyers out of the market, coupled with a recent tightening of lending standards, as indicated by a decline in the Mortgage Credit Availability Index.

HELOCs, credit card spending on the rise

The slowdown in lending is happening as new home equity lines of credit are surging. Nearly 365,000 HELOCs were added in the third quarter, totalling $70.5 billion, up 47.5% year-over-year.

In terms of dollar amounts, the increase in HELOC activity doesn't come close to balancing the drop-off in mortgage loans — and it's far from the record rates of HELOC activity seen in the mid-2000s — but it does represent some new activity for lenders, said Rick Sharga, executive vice president of market intelligence at ATTOM.

So why the uptick now? There are several possible reasons. It could be that borrowers are using HELOCs to make ends meet, but Sharga said it seems more likely that they are being used for more traditional purposes like home improvements, debt consolidation and unanticipated expenses. 

Homeowners, hesitant to sell while interest rates are high, might be choosing to make improvements in anticipation of a friendlier market down the road. More people may also be getting a HELOC as a hedge against potential financial stress in the event of a recession.

Credit card usage is also up, but again, it's hard to identify a single cause. Households might be struggling to pay for necessities, but other indicators suggest that's not a widespread factor since borrowers appear to be keeping up with payments. 

"Delinquency rates among credit card holders haven't gone up as credit card spending has increased," said Sharga. "That's something to keep an eye on going forward, as it would be a pretty strong indication of households struggling financially." 

Rising credit card usage could be an indication of consumers' ability or desire to spend more after two years of supply chain issues and labor shortages, Sharga said.

Buyers are borrowing less for home purchases

Although home prices are still up year-over-year, buyers are borrowing less and supplying a smaller down payment. The median amount borrowed nationwide to buy a home was $315,000 in the third quarter, down 4.5% from last spring. It's the first time the amount borrowed in the third quarter went down in three years, according to the report.

Down payment amounts also dropped slightly from 10.2% in the second quarter to 9.3% in the third quarter, though Sharga doesn't see that dip as an indicator of a trend. He did note that activity for FHA loans — which allow for lower down payments — increased from 11.4% of residential property loans in the third quarter, up from 9.4% a year ago.

Sharga said the most likely explanation for the decrease in borrowing and down payments is that homebuyers are choosing less expensive homes in the face of higher mortgage rates.

"That's really the only way a lot of prospective buyers will be able to afford to buy a property with interest rates still nearly double what they were a year ago," Sharga said in an email. 

"I expect that buyers will continue to look for lower-priced properties until and unless interest rates start to come back down," Sharga said. "This could mean buying smaller or older homes, homes further out in the far suburbs or near rural areas, homes needing more repairs, or even homes in lower-priced markets or states."