Mortgage Applications Plunge to Lowest Level in 2 Years. Is the Market Cooling Off?

A person putting a House for Sale sign in the front lawn of their property.

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Less demand could lead to a more approachable market for buyers.

Key points

  • Last week, mortgage application volume reached its lowest level since December 2019.
  • Higher mortgage rates are fueling this trend, as is limited inventory.

At several points in 2020 and 2021, mortgage lenders were inundated with home loan applications. But those days are clearly behind us.

Last week, mortgage applications decreased 13.1% from the previous week, reaching their lowest level since December 2019, as per the Mortgage Bankers Association. Refinance applications fell 15% from the previous week and were 56% lower than they were a year ago.

Why the pullback in mortgage applications?

During the second half of 2020 and 2021, mortgage rates sat at or near record lows. But rates have been notably higher to kick off 2022; as of this writing, the average 30-year loan rate is well above 4%. That easily explains the drop off in refinance application volume, and it also explains why fewer buyers are applying to finance a home.

Low inventory may also be leading to a decline in mortgage applications. The housing market has been starved for listings for well over a year. It stands to reason that if there aren't many homes to buy, there aren't as many mortgage applications to be filled out.

Is the housing market finally cooling?

Buyers faced record-high home prices in 2021, to the point where many people were inevitably priced out of the market. But rising mortgage rates could lead to a gradual cool down -- and a notable drop in home values. That's a good thing for buyers, who have been at a clear disadvantage for over a year and counting.

Still, for home prices to really start to drop, we need more inventory to hit the market. The reality is that even at a time when mortgage rates are up, the demand for homes still exists. And any time you have a situation where the supply of a given commodity can't meet demand, its price has the potential to rise and stay inflated.

Many sellers have held off on listing their homes due to both pandemic-related and economic uncertainty. But at this point, the omicron surge seems to have tapered off, and the economy seems relatively stable despite record-high levels of inflation (it may seem counterintuitive, but inflation can actually be a sign of a healthy economy). We could see an uptick in listings later this year, especially as the weather warms and sellers gear up for the typical spring boom.

Will 2022 be a good year to buy a home?

Though mortgage rates could continue to rise throughout the year, if home prices come down enough, it could lead to affordable options for buyers. Ultimately, housing inventory will play a huge role in whether that happens. Those interested in buying a home in the near term should keep tabs on the market -- and hope it opens up substantially after a tough 2021.

Potential home buyers should also do what they can to reap as much savings as possible on a mortgage. For the most part, that means coming in with strong credit and paying off as much debt as they can before submitting those home loan applications.

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