There is a lot of data that you can look at about the housing market if you are trying to get a sense of which way the wind blows. There are numbers about everything. You can look at home prices. You can look at home inventory. You can even look at the number of home sales. Typically, one data point is usually not enough information to give you a clear picture of the real estate landscape. Individual data points can be misleading and relying on them alone might give you a skewed understanding of the health of the housing market. With that in mind, the data regarding mortgage applications deserves further attention. If you are paying attention to the number of mortgage applications being processed, you might wonder if it is a warning sign for the market. However, other data indicates that declining mortgage applications is nothing to worry about. 

The Data Regarding Mortgage Applications

On its face, the data regarding mortgage applications seems kind of ominous. The amount of mortgage applications has dropped dramatically and is now at a 18-month low. Over the past week, mortgage applications dropped 6.9%. The levels we saw last week are reminiscent of the amount of mortgage applications we were seeing before the pandemic. This data begs a lot of questions. Why are the numbers of mortgage applications declining? Does this mean that the housing market is set for a downturn? Is this something that home buyers and homeowners should worry about? Again, the number of mortgage applications is merely a single data point. It is necessary to look at other things happening in the reale estate market to get a clearer picture. When you look at other data it becomes clear that these numbers are nothing to worry about.

Mortgage Rates Remain Low

One possible reason for mortgage applications to decline is that demand is tapering off. In order to understand the demand, it is necessary to look at mortgage rates. Much of the intense demand we have seen over the past year has been because mortgage rates dropped to historic lows. Home buyers saw this as a chance to buy a house and lock in low payments for the life of their home lona. Homeowners saw this as a chance to reduce their payments and refinance at a lower rate. Did mortgage rates go up, which caused demand to decrease? 

The answer is a resounding no. Instead of rising, mortgage rates have actually been going even lower. Many have been expecting mortgage rates to rise over the past six months. Many experts predicted that this is an inevitability because the Federal Reserve would increase interest rates to try and curb inflation. However, the Federal Reserve has made no such moves and has publicly declared that inflation is merely transitory. It is possible that the Federal Reserve raises interest rates in the near future, which in turn would increase mortgage rates. However, this is not what has happened and it does not offer an explanation for why mortgage rates are down. 

Home Sales Remain Strong

To figure out whether or not declining mortgage applications is a warning sign, it is important to also look at pending home sales. If mortgage applications are declining and home sales are declining, then there might be a stronger case that danger is on the horizon. However, the data on pending home sales is painting a much rosier picture. Pending home sales are going through the roof. We only are just now getting the data from May, however, May’s numbers are up 8% from April and are up 13.1% from May 2020. In nearly every market in the United States, home buyers are still lining up. This data point is important because it gives further credence to the idea that home buyer demand has not tapered off. People still recognize the value of buying a house even with today’s prices. 

Inventory is the Missing Piece of the Home Buying Puzzle 

Based on other data, it is clear that demand to buy a home is still high, which means that the problem is most likely on the supply side. Regardless of how high demand is, home buyers cannot purchase a home if there is not a home to purchase. It is no secret that the housing inventory has dropped to record lows. This has caused a blockage in the real estate market that is probably causing a decrease in mortgage applications. It has been so difficult to find a house to buy that there has been no need for financing. Why apply for a home loan if you cannot find a home? 

Thankfully, there are some signs that things are changing. Inventory relief might be on the horizon. June inventory of homes for sale increased dramatically. The number of homes for sale increased 10.9% from May and 5.5& from June 2020. Many homeowners are looking at today’s market and deciding that right now might be the perfect time to sell their houses. Home values have increased dramatically and many homeowners are flush with equity. Selling now would give them a health profit on their investment and would still give them the benefit of a sellers market. While today’s real estate market is the ultimate sellers market, it will not always be that way. Market conditions will change and buyers will take back the upperhand. 

There are some signs that sellers might start losing their advantage soon. Homebuilders are doing everything they can in order to catch up with the outrageous demand from home buyers. Over half of all construction spending in the United States is residential housing spending. Spending on residential construction for single-family units increased over 46% in May from last year’s spending. It is only a matter of time before construction catches up and the number of new homes available is able to meet today’s demand. When that happens, homeowners will be in a much tougher position to sell their houses. 

Final Thoughts

The real estate market is a dynamic system. There are a lot of moving parts and the numbers used to describe it are always in flux. At any given point, different data points can give a positive or negative view of the market’s trajectory. That is why it is always important to look at the data as a whole and not get too caught up on any single statistic. While declining mortgage applications might be worrisome in some contexts, the overwhelming amount of data indicates that the real estate market is still strong. Homeowners and home buyers have nothing to fear. 

If you have been thinking about buying a home and want to see what options you have to finance your purchase, contact us. The team at Peoples Choice Mortgage is here to walk you through all of your choices and help you make your dream of owning a home a reality.