Homebuyer Mortgage Demand Drops Further, Clouding Spring Market Outlook

The housing market's outlook for the upcoming spring season is growing increasingly uncertain as mortgage demand from homebuyers continues to decline. According to the Mortgage Bankers Association (MBA), mortgage applications to purchase a home last week dropped 4% compared with the previous week, marking a significant decrease in demand. This trend is particularly concerning given that the spring season is typically a crucial period for home sales.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) decreased to 6.97% from 7.02%, with points increasing to 0.64 from 0.63 (including the origination fee) for loans with a 20% down payment. While this slight decrease in rates may have contributed to a 12% increase in applications to refinance a home loan, it has not been enough to stimulate homebuyer demand.



The primary factors contributing to the decline in homebuyer mortgage demand are high mortgage rates, limited inventory, rising home prices, and economic uncertainty. High mortgage rates make homeownership less affordable for many potential buyers, while limited inventory and rising home prices create a competitive market that favors sellers. Additionally, the ongoing policy uncertainty and economic conditions may contribute to the decline in homebuyer demand, as potential buyers may be hesitant to make such a significant investment in an uncertain economic environment.

The current supply of homes for sale is still 25% below where it was in January 2019, despite a 25% increase compared with a year ago. This low supply has been a persistent issue in the housing market for over a decade, driven by factors such as below-average new home construction and demographic trends that have led homeowners to hold onto their properties longer. The low supply of homes for sale has several implications for home prices and demand in the coming months. First, the limited inventory can lead to increased competition among buyers, driving up home prices. This is because there are more buyers than sellers, and when demand outpaces supply, prices tend to rise. In fact, the national median sales price of a previously occupied home rose 5.8% in May 2024 compared with a year earlier, reaching an all-time high.

Second, the low supply of homes for sale can also impact demand. When there are not enough homes for sale, potential buyers may be discouraged from entering the market, as they may struggle to find a suitable property. This can lead to a decrease in demand, which can in turn impact home prices. However, it is important to note that demand has remained relatively strong despite the low supply, as evidenced by the fact that home sales are running at a near-30-year low.

In the coming months, the housing market is expected to face continued challenges with low supply and high demand. However, there are some factors that could help alleviate these issues. For example, the Federal Reserve has indicated that it may cut interest rates in the coming months, which could make home loans more affordable and encourage more buyers to enter the market. Additionally, the increase in new listings and the longer time it takes for homes to sell could also help to increase the supply of homes for sale, which could in turn help to ease prices and increase demand.

In conclusion, the decline in homebuyer mortgage demand is a troubling sign for the spring housing market. High mortgage rates, limited inventory, rising home prices, and economic uncertainty are all contributing factors to this decline. While there are some potential solutions to these issues, the housing market is expected to face continued challenges in the coming months. Homebuyers and investors should closely monitor the housing market and consider the potential implications of these trends on their decisions.