Mortgage Applications Decrease Even as Rates Fall

It's more affordable than ever to finance a home -- so why did applications decline?

There's a reason potential buyers have clamored to purchase homes since this time last year: Mortgage rates have been at very competitive levels since the middle of 2020. And recently, they dropped to some of the lowest levels since the start of 2021.

But in spite of that, mortgage applications declined by 1.7% for the week ending July 30, according to the Mortgage Bankers Association. While that may be surprising at first glance, when we consider the state of the housing market, it makes sense.

Why mortgage applications dropped

Even though mortgage rates recently reached very attractive levels, applications to purchase homes may have declined for two key reasons:

• Home prices are too high.
• Inventory is too limited.

In May, home prices were 16.6% higher than in May 2020, according to the S&P CoreLogic Case-Shiller index. That's the highest reading the index has registered in more than 30 years.

Higher home prices are great for sellers, but they're forcing a lot of buyers to put their homeownership plans on hold. And while low mortgage rates can help offset higher home prices, that can only go so far.

There's also low inventory to consider. In June, housing inventory rose slightly compared to May, when that level climbed from a 2.5-month supply of available homes to a 2.6-month supply. That's an improvement, but it's still not a healthy level of inventory for buyers. It generally takes a 4- to 5-month supply of homes to create a market in which inventory meets demand. So mortgage applications may also have decreased because buyers simply couldn't find homes to suit their needs or budgets.

Let's also remember that low housing inventory sets the stage for bidding wars, when two or more buyers duke it out over the same property. Bidding wars are great for sellers, since they generally result in higher sale prices. But for buyers, they're bad -- the process can be extremely stressful and usually, the winner of the war pays a lot more than what the seller initially asked.

Will mortgage applications continue to decrease?

Mortgage application volume can fluctuate from week to week, so while it declined this past week, we could see an uptick for the next week. The way mortgage rates trend could also impact the number of new home loans.

A decrease in mortgage applications -- especially a single week with lower application volume -- doesn't necessarily mean the housing market is in trouble. If applications decline steadily from here, that's a different story. For now, the fact that applications were down last week shouldn't give sellers anything to worry about.