Mortgage Demand Declines as 2020 Winds Down

Inflated home prices may be pushing buyers to ease up and step back.

It's been an interesting year for the housing market. Despite a recession, home values have skyrocketed in 2020 as low mortgage rates have driven buyers to purchase homes. Limited housing inventory has also contributed to higher home prices.

But it seems mortgage activity has slowed during the holiday season. This week, mortgage applications to buy a new home fell 5% on the week before, according to the Mortgage Banker's Association. Though it's worth noting that they were still 26% higher than the same week one year prior. Still, this is the second decrease in three weeks, and it could indicate buyers have had enough of inflated home prices.

Mortgage savings are being wiped out

There's lots to be gained by locking in a 30-year mortgage at well under 3%. And that's is doable today for borrowers with strong credit scores. The trouble is, a lot of the money you save could be negated by higher home prices. In fact, the average loan balance for new purchase mortgages last week reached a record high of $376,800. Now part of that has to do with the fact that sales for higher-end homes have been more active. But it still speaks to the fact that home values have climbed and aren't creeping down anytime soon.

That said, if mortgage demand continues to decline, we could see home prices slowly but surely start to follow suit. And that means buyers who sit tight and postpone their home searches could wind up paying a lot less if they make an offer on a property in 2021.

Of course, that begs the question -- what about mortgage rates? Will waiting to buy mean missing out on today's solid opportunities?

Probably not. It's impossible to predict exactly how mortgage rates will trend in the coming year, but there's a good chance we'll continue to see today's low rates for at least the first part of 2021. And even as 2021 progresses, there's a strong likelihood rates will remain low as the U.S. attempts to dig its economy out of the problems caused by the coronavirus pandemic.

Also, if things improve on the pandemic front, housing inventory could open up substantially as sellers grow more comfortable inviting would-be buyers into their homes. And that, in turn, could help drive home prices downward.

Inventory could open up in 2021

Another thing that might happen -- for better as well as for worse -- is that we see an uptick in foreclosures in 2021 as coronavirus relief for existing borrowers comes to an end. Clearly, that's not a good thing for those who risk losing their homes. But we can't ignore the fact that it could lead to an increase in total inventory and allow more new buyers to snatch up lower-cost homes. Foreclosures, generally speaking, tend to be available at a discount. There are certainly dangers and drawbacks to buying one, but it can also offer the opportunity to save on a purchase price.

Of course, it could be that mortgage demand has dropped recently because would-be borrowers are simply distracted by the holidays. But we can't ignore the fact that inflated home prices may have caused some buyers to put their feet down and refuse to pay up.