Mortgage Applications Are Plummeting. Is the Housing Market Collapsing?

Mortgage Applications Are Plummeting. Is the Housing Market Collapsing?

Agents, buyers, sellers, and investors have had ample reason to question the sustainability of the real estate market. After all, the scorching-hot housing market was fueled in part by COVID-related lockdowns and life disruptions that are becoming more rare. Rising interest rates, intractably high home prices, and continued rumblings about a recession add to skepticism about the housing market’s health.

Enter another housing market warning sign: A sustained drop in mortgage applications.

When people need a home loan, they submit to lenders a mortgage application, which contains information on the borrower’s income, employment history, and the property being purchased. Since mortgage applications are for consumers the first step of obtaining a home loan, they’re often used as a gauge of industry-wide housing demand.

With mortgage applications down a full 15% year-over-year, should agents fear a housing market implosion? Our data says no. Homesnap’s team of data scientists investigated and found that when comparing the first week of June 2022 with the first week of May 2022, active home listings increased by 26.6%, while the number of active open houses skyrocketed by 71.2%.

What’s going on? If fewer people are applying for mortgages, how can more people be listing and touring properties?

In short, the drop in mortgage applications indicates a housing market that’s due for cooling, but not yet. For the duration of busy season, at least, fewer mortgage applications will likely coexist with a competitive housing market.

How Can the Housing Market Remain Robust, Even as Mortgage Applications Decrease?

Mortgage applications are falling because mortgage rates are rising. Basically, as the cost of borrowing for a home loan increases, fewer buyers are qualified to seek one.

But even with interest rates set to rise throughout 2022, the housing market isn’t collapsing. As our data scientists found, home listings and open houses are actually increasing. There are 3 reasons:

1. The Market Takes Time to Change

A reduction in mortgage applications isn’t tanking the housing market because reduced demand takes time to ripple through the market. In fact, months can elapse between submitting a mortgage application and closing on a property. For new home buyers, it could be six months or a full year between submitting a mortgage application and moving into a home.

Fewer mortgage applications in the spring and summer may not materially affect the housing market until the fall and winter. Mortgage applications are a measure of housing demand, but not necessarily of today’s demand. The housing market is big and complicated, and doesn’t adjust to consumer behavior overnight.

2. Housing Inventory Remains Low

Other than high prices, the trend agents most frequently identify about today’s housing market is record-low housing inventory. That inventory isn’t expected to soon replenish, so the housing market is unlikely to topple.

Low housing inventory means the number of people who want a home continues to far eclipse the number of available properties. With low listings, having fewer people seeking a mortgage isn’t a death knell for the real estate market – even if it results in tapering home prices.

3. It’s Busy Season

For all the broader market forces at play, an increase in home listings and open houses just after Memorial Day isn’t unusual. It’s just busy season.

If the normal real estate cycle seemed blurred or even erased in 2020 and 2021, it was because the market was turbocharged – hugely affected by the COVID-19 pandemic and the social and financial changes wrought by it. Now, the market may simply be approaching something close to normal. Summer’s starting, kids are out of school, people are allowed to slip out of the office early on Fridays, agents have more daylight during which to host home tours – the market is found to pick up.

The return of a conventional busy season points to a related reality: Reduced mortgage demand may put the market back to where it was in 2018 or 2019. Agents still had ample buyer demand during that time, even if the market wasn’t going gangbusters. Home buying seasonality shifting back to normal doesn’t mean the sky is falling, and a reduction in mortgage applications doesn’t make for a housing market meltdown.