Mortgage Demand Falls to 22-Year Low. Will That Help Cool the Housing Market?

Plunging mortgage demand is actually good news for buyers.

There was a time not so long ago when mortgage lenders were flooded with home loan applications. But these days, that's hardly the case.

In fact, mortgage demand just reached its lowest level since 2000, according to the Mortgage Bankers Association. And we can blame that on a combination of factors -- chiefly rising mortgage rates and sky-high home prices.

For the week ending July 16, applications for a mortgage to purchase a home dropped 7% from a week prior and 19% from the same week in 2021. And with the average 30-year mortgage rate creeping back toward 6% (a level it's already reached this year), it's easy to see why. For context, the average 30-year mortgage rate was 3.11% during the same week a year ago.

Will plunging mortgage demand cool the housing market?

Buyers may be hitting pause on their home searches and putting mortgage applications on hold. But the reality is that doing so could cause an important shift in the housing market -- one that leads to a gradual but much-needed drop in home prices.

Right now, a big reason home prices are so high is that the real estate market lacks inventory in a very big way, and so the number of buyers who wish to purchase a home exceeds the number of homes that are available for sale. If buyers continue to pull out of the market, it could drive home prices downward, making them more affordable.

Of course, if that were to happen, it would then likely lead to an uptick in mortgage demand. But while that's a scenario buyers might encounter at some point, it's unlikely to happen overnight. Rather, we could still be many months away from reaching the point where homes are considered "affordable" on a national level.

Should you wait to purchase a home?

You may have decided that 2022 would be the year you'd buy a home, only to see soaring prices and rising mortgage rates. At this point, housing market conditions are sorely unfavorable to buyers. And while things could change months down the line, it's important to accept the reality that right now, at this very moment, it's just not a good time to buy.

Now, if you're in a lousy housing situation, like a too-small apartment or a rental with an absentee landlord who won't address issues in a reasonably timely manner, then you may want to forge forward with plans to purchase a home -- even if it means paying a premium and signing up for an expensive mortgage (though remember, you may be able to refinance to a more affordable loan down the line). But if your current housing setup is decent, then pushing yourself to buy within the next few months is a move you might regret.

Sure, you might think that if you purchase a home soon, you'll avoid a scenario where you get stuck with an even higher mortgage rate. But we don't know exactly how mortgage rates will trend. And even if they creep upward, waiting to buy could mean paying a lot less for a home. And the savings there could well outweigh the higher borrowing rate you might end up with.