What's behind the sluggish recent pace of mortgage applications?

MBA VP and deputy chief economist on current trends

What's behind the sluggish recent pace of mortgage applications?

A sliver of good news arrived for homebuyers last week as the 30-year fixed-rate mortgage slipped below 7% – but a moderate decline failed to substantially change the borrowing outlook as mortgage applications also dipped.

That slight drop in average mortgage rates, to 6.99%, arrived as the Mortgage Bankers Association (MBA) reported a 5.2% decrease in its Market Composite Index, measuring mortgage loan application volume, for the week ending May 31.

For Joel Kan (pictured top), vice president and deputy chief economist at MBA, recent sluggish figures on the mortgage application front have been driven by the affordability crunch caused by high rates, as well as the much-publicized “lock-in effect” resulting from the high rate differential that’s emerged over the past two years.

That phenomenon – which is seeing homeowners choose to stay in place rather than make a move because of the likelihood that they’d have to take out a new mortgage at a much higher rate than their current one – has significantly weighed down on application activity, Kan told Mortgage Professional America.

“There’s less willingness for current homeowners to list their homes for sale because they’d be giving up a much lower rate in order to sell. So they [could be] giving up a 3% rate. And if they’re buying another house, they’re having to buy at a 7% rate, just speaking in average terms there,” he said.

“So that’s been holding lots of units off the market that I think in most other cycles would typically be up for sale – which would then put a little bit less pressure on prices in general because again, more inventory means it’s a little bit less competitive for buyers.”

Homebuilders stepping up to the plate amid lack of new listings

That shortfall in existing inventory as a result of homeowner reluctance to sell means fewer options for buyers and greater competition for desired homes – although one bright spot has been new home construction taking the place of some of those transactions, Kan added, with homebuilders closely attuned to the current market conditions and supply shortages.

Many are attempting to ramp up production or build to cater to where the demand is because of the lack of inventory, he said, helping push up the number of move-in-ready homes on the market.

Some have also been able to offer incentives such as rate buydowns or other concessions to help homebuyers with higher costs and rates. Kan noted that MBA’s Builder Application Survey (BAS), which gauges loan application activity received from homebuilders for new single-family properties, had registered increases on a year-over-year basis for several months in a row.

In April alone, new home purchase applications were up 22.1% compared with the same time last year, according to the BAS, and 2% over March.

“You have buyers out there who either can’t find a unit that they want or if they find it, it’s hard to compete – or rates are making things much less affordable for them,” he said. “And the ones that are still in the market are turning to the new construction side because it’s slightly less competitive, maybe. But [those builder concessions] are making it a little bit easier.”

Supply challenges long evident in US housing market

The prevalence of homeowners who are choosing to stay in place rather than move because of low rates has only served to intensify supply challenges that have been evident for over a decade, stretching back to the global financial meltdown of 2007-08.

“It really goes back to the great financial crisis. There was overbuilding leading up to that last crisis, which caused an inventory overhang,” Kan said, “and I think coming out of the GFC, you had lots of homebuilders go out of business and the ones that were able to stick it out, they just built a lot fewer homes.

“And the structural supply of homes has been low. You can just say we’ve been undersupplied the entire decade, right from 2010 to 2020, so I think that undersupply was exacerbated by the fact that we got a few years of lower rates and then this lock-in [transpired].”

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