Don’t believe the hype about 'surging' mortgage applications, housing expert says

Mainstream media has been reporting about a “surge” in weekly mortgage applications, but one housing expert warns readers not to take the bait.

According to Nick Gerli, the CEO of housing market data provider Reventure App, “Mortgage purchase applications are down 8% from last year and 50% from pre-pandemic levels.”

So, while mortgage loan applications increased by 16.8% in the week of Aug. 9, “homebuyer demand is still in the basement,” he said.

In Gerli’s view, media outlets reporting on mortgage applications are “creating the false perceptions of some type of meaningful bounce back in housing interest/demand.”

Nothing could be further from the truth.

A deeper dive into the mortgage application data revealed that the recent uptick was driven by refinance activities rather than new purchases.

Refinancing “saw its strong week since May 2022,” said Joel Kan, the deputy chief economist at the Mortgage Bankers Association, which is responsible for the data.

Nearly 49% of total mortgage applications came from refinancing, up from almost 42% the previous week. Meanwhile, mortgage applications for new purchases grew by just 3%.

The data highlights the gravitational pull mortgage rates continue to exert on housing demand and showcases the “weird and ugly” state of the U.S. housing market.

The state of U.S. real estate

Although housing demand has always been sensitive to interest rates, the Federal Reserve’s post-pandemic rate hikes exposed a market that has grown overly accustomed to ultra-low financing costs.

As The New York Times reported, the housing market today is “different and stranger than the one described in economics textbooks.”

One of the biggest problems is that rate hikes created a “market of stark divides” between homeowners who are locked into ultra-low mortgage rates and those who face the highest financing costs in decades.

As homeowners refuse to sell and builders construct fewer properties, inventory levels dry up, driving prices higher. These are the disastrous market conditions facing first-time buyers.

This interest-rate tug-of-war between existing homeowners and prospective buyers could take years to resolve. According to Bank of America, the housing market could be stuck in this predicament until the early 2030s.

As Creditnews Research reported, nearly two-thirds of existing U.S. mortgages were financed when rates were below 4%. By comparison, mortgage rates have averaged 7% over the past 52 weeks, according to Freddie Mac data.

As the housing market remains locked in place, real estate prices are expected to continue rising for the foreseeable future. Economists at Goldman Sachs believe home prices will grow between 4.4% and 4.9% annually over the next three years.

Analysts at Moody’s Analytics are less bullish, but they still expect prices to rise over that period.

In either case, both organizations forecast more record-high home prices for years to come.