A troubling trend is emerging in the housing market: despite lower mortgage rates, homebuyers are not responding as expected. Mortgage applications for purchases have plummeted by 57% from their pandemic peak and remain 43% lower than pre-pandemic levels, leaving many industry experts surprised.
While conventional wisdom suggested that a decrease in mortgage rates would prompt a surge of buyers, the reality is quite different. This week’s mortgage application index shows only a modest 2% improvement compared to last year, but it’s down significantly—between 43% and 55%—compared to the same week in September over the past four years. Despite media narratives about a potential “rebound,” the data indicates that demand remains weak, suggesting underlying challenges that are often overlooked.
Three Key Factors Behind Low Homebuyer Demand
- Priced Out: Many prospective buyers are finding themselves priced out of the market. Even with lower mortgage rates, affordability remains a significant barrier. The Home Value/Income ratio currently sits around 4.6x, far exceeding the historical norm. This figure has only approached similar levels twice before: during the 2006 housing bubble and the post-World War II housing boom. In both instances, market corrections followed.
- Exhausted from Searching: The exhaustion felt by buyers is palpable. Many buyers have already been through extensive searches in a competitive market during 2020-2021, which led to a depletion of demand. Interestingly, mortgage application demand began to decline in late 2021, even while mortgage rates were still under 3%. This highlights a fundamental shift in buyer sentiment, not merely a reaction to rates.
- Record Pessimism: Perhaps most concerning is the record-level pessimism regarding the housing market. According to data from the University of Michigan, as of July 2024, 87% of homebuyers believe it’s a bad time to purchase a home, a sentiment even worse than during the high mortgage rates of the early 1980s. This pessimism, coupled with affordability issues, points to a long road ahead before we see any significant recovery in buyer demand.
The Need for Fundamental Change
The current landscape suggests that a quick rebound in demand is unlikely. Homebuyers are aware of the stark disparity between wages and home prices, and many are simply unwilling or unable to buy. Historically, the resolution to such imbalances has involved either falling prices or rising incomes.
Looking ahead, a blend of outcomes similar to those seen in 2006 and the post-WWII era may be on the horizon. Incremental price declines could occur alongside rising incomes, gradually restoring balance to the market. However, certain regions, particularly in the Sun Belt, may experience more rapid corrections in home values. Cities like Austin have already shown they can adjust quickly under the right conditions.
In contrast, the Northeast and Midwest may see slower changes. With supply still constrained in states like New York, New Jersey, and Illinois, a true recession might be necessary to unlock inventory, potentially leading to stagnation rather than outright corrections in home values.
As the housing market grapples with these multifaceted challenges, it remains clear that any meaningful recovery will require a shift in both buyer sentiment and economic conditions. Until then, homebuyers are likely to remain hesitant, with many choosing to sit on the sidelines as the market continues to evolve.
