by Maurie Backman | Published on July 31, 2021
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Here's why fewer people have been applying for mortgages to buy a home.
Mortgage rates have been sitting near historic lows since the beginning of 2021, but in recent weeks, they've really come down. In spite of that, mortgage applications to purchase a new home hit their lowest level in over a year for the week ending June 23, according to the Mortgage Bankers Association.
This is coming at a time when mortgage refinances are up. In fact, for the week ending June 23, total mortgage applications increased 5.7% from the previous week. But that increase was largely fueled by refinances.
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Fewer people have been applying for home loans because there aren't many homes available to buy. In June, housing inventory was up, and there were 1.25 million available homes for sale, representing a 2.6-month supply. But that's actually a relatively small number. A healthy housing market generally has a 4- or 5-month supply of available homes to buy. So when inventory creeps downward, mortgage application volume follows suit.
Another reason why purchase mortgage applications may be down is that home prices have been extremely inflated, and some buyers may finally be backing off. In June, the median price of an existing home sold increased to an all-time high of $363,300.
These days, a lot of homes on the market are winding up in bidding wars. The reason is that there aren't enough to choose from, so buyers are frequently being forced to duke it out over the same home. Bidding wars typically drive home prices up even more, so all told, it's a tough time to be buying -- and so some would-be home purchasers may finally be taking a step back.
On the other hand, now is a great time to refinance, what with rates being so low. Refinance rates are generally a notch higher than the rates you'll see for a purchase mortgage, but at this point, a lot of homeowners are taking advantage of their recent drop.
Furthermore, because home values have gotten so high, more people have equity in their homes and may be eager to take advantage of the option to do a cash-out refinance, which allows borrowers to borrow more than their remaining mortgage balances. Equity refers to the portion of a home its owner owns outright. A $400,000 home with a $300,000 mortgage gives its owner $100,000 in equity. That homeowner could refinance that $300,000 loan to a $320,000 loan and use the remaining $20,000 for any purpose.
If more homes hit the market, we could see purchase mortgage application volume pick up in the next few weeks. But that's a pretty big "if." Inventory has been low all year, and while it rose slightly in June compared to May, it'll take a lot more homes hitting the market to really make it so that property prices start coming down. And until there's more selection and more affordable buying options, purchase mortgage activity could remain stagnant or continue to decline.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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