Mortgage Applications Drop as Higher Rates Spook Buyers

by Maurie Backman | Updated July 19, 2021 - First published on Feb. 1, 2021

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Fewer buyers put in mortgage applications last week. Is demand finally waning?

Buyers have been clamoring to buy homes since summertime, when mortgage rates really started to hit historic lows. But mortgage applications to purchase a home fell 4% last week, reports the Mortgage Bankers Association. And a number of factors could be to blame.

Rates were higher

Mortgage rates rose last week for most loan products, which may have caused buyers to pull back on applications. To be clear, rates remained extremely competitive, historically speaking. In fact, at this point, buyers may be a little too used to ultra-low rates for their own good. They balk when rates start to creep up toward the 3% mark -- even though a 3% rate is an excellent deal.

Some buyers could also hope rates will drop even lower in the course of the year, and want to wait to apply for mortgages as a result. Many mortgage experts agree that rates will stay competitive throughout 2021, though it's difficult to predict whether they'll actually drop further.

Home prices are high

Jumping mortgage rates may have spooked buyers a little last week, but let's also remember that home prices have been inflated across the board. The median price of an existing home sold in December was $309,800, according to the National Association of Realtors. That represents a 12.9% increase from the year before. It's also the highest December median price on record.

While January home price data isn't available as of this writing, based on December's figures, it could be that buyers are growing weary of high prices. In fact, last week, the average mortgage amount for home buyers hit a record high of $395,200. That may be too much house for a lot of buyers' budgets.

The pickings could be slim

Finally, limited inventory could be creating a scenario where buyers just aren't finding properties they like -- hence the decline in mortgage applications. There's been an especially piddly supply of lower-end or starter homes, and that could be pushing first-time buyers out temporarily.

What's next for mortgage applications?

Mortgage application volume may very well pick up in the coming weeks, especially if mortgage rates drop or hold steady. The fact that they declined last week isn't necessarily indicative of an ongoing trend.

That said, it'll be interesting to see how many people apply for mortgages in the coming weeks, especially as historically, winter's a sluggish time for home purchases. Spring, by contrast, is when more homes tend to hit the market, so we may see application rates fall in the near term but pick up again once inventory grows more robust.

Incidentally, mortgage refinance activity also declined by 5% last week as refinance rates rose as well. Refinance rates tend to trend a bit higher than purchase mortgage rates, but they, too, have been competitive since summertime. Last week could very well have just been a blip on the mortgage front overall, but ultimately, only time will tell.

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