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Are Homebuyers Hitting a Wall? Mortgage Apps and Pending Sales Suggest Slowing Demand

Mortgage applications and pending sales are slumping. Is this homebuyers hitting a wall or a seasonal homebuying pattern?

February 25, 2022
February 25, 2022
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After nearly two years of pedal-to-the-metal demand, it appears homebuyers are pumping the brakes heading into peak homebuying season.

Two reports came out this week that suggest a slow down in the home purchase market.

First, the Mortgage Bankers Association’s (MBA) weekly survey showed mortgage applications dropping to the lowest level since December 2019. Total application volume was down 11% from the previous week.

Much of that was due to refinance activity decreasing 16% as mortgage rates flirt with 4%. But purchase activity also declined for the third straight week. Purchase applications were down 6% from the previous week and 6% year-over-year.

"Purchase applications, already constrained by elevated sales prices and tight inventory, have also been impacted by these higher rates and declined for the third straight week,” said Joel Kan, MBA's Associate Vice President of Economic and Industry Forecasting. “While the average loan size did not increase this week, it remained close to the survey's record high."

On Friday, the National Association of Realtors (NAR) reported that pending home sales – a forward-indicator of home sales – slumped in January. Also known as contract signings, pending home sales fell 5.7% from December to January and were down in every region except the West.

Contract signings were down 9.5% from last January, when mortgage rates were almost a full percentage point lower.

Are homebuyers hitting a wall?

The two reports paint a clear picture that home purchase activity decreased in recent weeks. But is this trend or mirage?

It’s typical for purchase activity to slow in the winter as there are fewer homes for sale. That’s certainly a contributing factor this year given active listings reached an all-time low in January. According to there were just over 400,000 active listings last month, compared to more than a million in the same period in 2020.

“With inventory at an all-time low, buyers are still having a difficult time finding a home,” said Lawrence Yun, NAR's chief economist.

Inventory is not the only hurdle homebuyers are facing. Mortgage rates have climbed from the low 3’s to the near-4% in recent months. Combined with 119 consecutive months of rising home prices, affordability is becoming a significant constraint, especially for first-time buyers.

The Russian invasion of Ukraine added a new wrinkle to the homebuying equation. The invasion is expected to drive up energy prices and take money out of the pockets of prospective homebuyers.

It could also cause mortgage rates to fall, as global conflicts usually do.

“There's also the possibility that investors may flee toward safer U.S. Treasury bonds, which may result in temporary short-term relief to interest rates,” Yun added.

Yun said it would not be surprising to see a retreat in housing demand. However, that hardly means home prices will come down anytime soon. Even with a series of hurdles to clear, demand from a massive wave of millennial buyers far outpaces supply, which all but guarantees another competitive housing market in 2022.

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