New mortgage applications slumped to their lowest levels since early March as the 30-year fixed mortgage rate crested over 7%.

According to the Mortgage Bankers Association, applications dropped by 5.7% on a seasonally adjusted basis during the week ending May 24.

“Mortgage rates increased for the first time in four weeks, with the 30-year fixed rate up to 7.05% and all other loan types also seeing increases,” said Joel Kan, vice president and deputy chief economist at Mortgage Bankers Association.

“The uptick in rates led to a decline in mortgage applications heading into Memorial Day weekend.”

The average mortgage rate on a jumbo loan—a balance greater than $766,550—also increased week over week to 7.22%, down from 7.18%.

Meanwhile, purchase loan applications decreased by 1% week over week, while refinance applications fell by 14% week over week.

”Borrowers remain sensitive to small increases in rates, impacting the refinance market and keeping purchase applications below last year’s levels,” Kan said.

“There continues to be limited levels of existing homes for sale and many buyers are struggling to find listings in their price range that meet their needs.”

Household salary vs. home price

Housing prices have been on a steady incline since the pandemic, with the median existing-home sales price creeping above $400,000 in April.

Meanwhile, wages aren't keeping up. The median household income was $74,500 in 2022—a 2.3% decline from $76,330 in 2021.

”Home values are near record highs, and if you want a house, you have little choice but to pay a high price,” said Jeff Ostrowski, a housing market analyst for Bankrate.

The problem is that very few people can qualify for a mortgage, considering no more than 28% of a household's income should be spent on housing.

”Affordability is the biggest issue — finding a home that’s in your budget,” Ostrowski said. “The higher the price of a home, the harder it is to come up with the down payment or to qualify for the monthly payment.”

Will mortgage rates come down?

Mortgage rates are indirectly tied to inflation because it influences the Fed's decision-making on interest rates.

Although 3.5% is still higher than the Fed’s 2% stated target, the central bank did leave interest rates unchanged at its last meeting in May.

Whether the central bank cut rates as promised at the beginning of the year or leave them unchanged remains a big unknown.

”Expect more rate volatility ahead as the Fed and investors wait for more conclusive evidence of a return to low, stable and more predictable inflation,” said Orphe Divounguy, a senior economist at Zillow Home Loans.

In May, Fed officials cautioned against a quick rate cut as they look for signs of price stabilization across the economy before making any drastic cuts.

”We’re in a period when patience really matters,” said Boston Fed President Susan Collins. “I think the data has been very mixed and it’s going to take longer than I had previously thought.”

The Fed will hold its next meeting on June 11-12.