Mortgage Applications Are on a Decline. Here Are Some Reasons Why

Mortgage activity has been sluggish these past few weeks -- and there are a few factors behind that trend.

At several points last year, mortgage lenders were overwhelmed with home loan applications. But now, those applications seem to be slowing down.

Mortgage applications declined for the third straight week, reports the Mortgage Bankers Association, and they fell 3.1% for the week ending June 4. Refinance activity saw the most substantial decline, despite refinance rates holding fairly steady in recent weeks.

In fact, mortgage rates on a whole have been very competitive this entire year. So why the ongoing drop in applications? Here are a few explanations.

1. There's not enough inventory

Housing inventory has dipped substantially in the course of the pandemic, to the point where in April, buyers were looking at just a 1.1-month supply of available homes, according to RE/MAX. In a more balanced real estate market, supply tends to sit at a four- or five-month supply.

If there are fewer homes available to buy, then fewer mortgages are apt to get signed. As such, it's easy to see why mortgage activity has been on a downswing.

2. Homes are becoming less affordable

Not only are there limited homes on the real estate market right now, but the homes that are available have become more expensive than ever. Recently, the average purchase mortgage totaled $407,000, whereas for all of 2020, the average home loan came to $353,900.

Higher home prices are forcing a lot of buyers out of the market right now. And if people aren't buying, then mortgages won't get signed.

3. Existing borrowers may have already capitalized on the refinance boom

Though refinance rates are very attractive right now, they're higher than they were last summer, when they truly dipped to record lows. In fact, many borrowers rushed to refinance their mortgages last year in advance of a new 0.5% fee that went into effect in December 2020 -- a fee that now makes refinancing a bit less attractive.

It could be the case that the majority of homeowners who stood to benefit from refinancing already did so in 2020, or even earlier this year. And that could be driving total mortgage applications down.

Will mortgage volume pick up?

Right now, housing inventory is at an extreme low, so it's fair to assume that in time, more homes will hit the market. Once there are more properties to purchase, mortgage loan application volume should increase.

Refinances, however, may be a different story. Refinance rates are unlikely to dip much below today's levels, so borrowers who already have a low interest rate on their mortgages may not benefit that much from getting new home loans.

That said, some borrowers may have seen their credit scores take a hit during the pandemic if circumstances forced them to fall behind on bills. So those who can boost their credit in the near term might benefit from refinancing.

All told, it's tough to predict how mortgage volume will fluctuate in time. But it will definitely be interesting to see if this recent downward trend persists.