Mortgage Demand Is Dropping. Will Home Prices Start to Come Down?

Fewer applicants sought out mortgages at the end of 2020. Could waning demand start to push home prices downward?

2020 was a popular year to apply for a mortgage, and given that interest rates dropped to record lows, it's easy to see why. But demand for mortgages -- and homes -- may finally be waning.

Mortgage applications for new home purchases fell 0.8% in the two-week period ending on Jan. 1 compared to the second week in December, reports the Mortgage Bankers Association. What's equally notable is that home purchase volume was only 3% higher during that period than during the same time frame one year prior. By contrast, at different points in 2020, purchase volume was over 20% higher year over year.

While it's possible that buyers hit pause on mortgage applications and home purchases due to holiday distractions, the data could also indicate that buyers are growing weary of inflated home prices. The question is: Will mortgage application volume continue to shrink as 2021 moves along? And will that finally start driving home prices down to more affordable levels?

Mortgage rate savings are getting wiped out

Though mortgage rates may be extremely attractive these days, what buyers are saving on interest rates, they're paying for in the form of costlier homes. In November, the median price of a home sold was $310,800. That's a whopping 14.6% increase from just a year prior -- and a high enough jump to negate mortgage rate savings.

If buyers start pulling back and homes sit on the market longer, there's a strong chance prices will slowly but surely begin to drop. If that happens, it could open the door to better buyer opportunities later in the year.

Added housing inventory will also help bring home prices back down to more moderate levels. As of November, there was a mere 2.3-month supply of available homes to purchase. For a more even housing market -- one where sellers don't have a clear upper hand -- a five-month supply is needed.

Should you plan to buy a home in 2021?

Right now, buying a home may pose a challenge. Not only will you be grappling with inflated prices, but you'll also have fewer homes than usual to choose from. That could, in turn, result in a scenario where you're forced to settle for lackluster home features or sink additional money into a property just to make it more suitable for your needs.

While it's true that there are great deals to be had on mortgage rates, especially if you're an applicant with a high credit score and a low level of debt, you may be better off waiting a few months to see how home sales trend. If they decline, you may end up in a stronger position to negotiate a better deal for yourself. The same holds true if inventory opens up.

Meanwhile, mortgage rates are likely to stay low throughout the year as the U.S. economy attempts a recovery. So waiting at least a few months to buy could be a smart move that saves you money and makes for a more fruitful, pleasant home search.