Applications Point to Slow Summer Housing Season

Demand for mortgages to buy homes is continuing to dwindle, suggesting that the real estate market faces a discouraging summer.

The volume of home-purchase mortgage applications dropped a seasonally-adjusted 6 percent in the week ending June 4 from the previous week, the Mortgage Bankers Association said Wednesday. "Purchase applications are now 35 percent below their level of four weeks ago, as homebuyers have not yet returned to the market following the expiration of the homebuyer tax credit at the end of April," Michael Fratantoni, the trade group's vice president of research and economics, said in a statement accompanying the release.

[Check out 10 Cities for Retirement Property Steals.]

Uncle Sam handed out tax credits worth up to $8,000 to qualified home buyers who signed sales contracts by April 30. The incentive worked to pull transactions that would have otherwise taken place in May or June into earlier months, juicing home sales in the runup to the deadline. But now that the credit has expired, demand has evaporated. "You are talking about advancing demand from the next period to an artificially imposed deadline," says Keith Gumbinger of HSH.com. "So instead of having a smoother kind of wave motion in terms of how the demand is formed and then satisfied, you get these spikes."

The report also found that although 30-year fixed mortgage rates fell to 4.81 percent, demand for mortgage refinancings declined. Application volume dropped more than 14 percent during the period. John Bancroft, the executive editor of Inside Mortgage Finance, points to "burnout" as a key factor behind the development. "Everybody who has had a chance to refinance has taken advantage of [it]." He also says declining home prices have made refinancing impossible for many property owners. "In order for them to refinance, they would have to put cash into the transaction," Bancroft says.

[See Home Prices Have Further to Fall: Here's Why.]

The slowdown in mortgage demand is occurring in the face of market forces that typically make home purchases more attractive to consumers. Real estate values have fallen sharply from their peaks during the housing boom, helping restore affordability to the market. Mortgage rates are extremely low. And even the labor market appears to be stabilizing after shedding millions of jobs.

But Gumbinger notes that some would-be home buyers may be holding off until prices begin a sustainable recovery. And even though mortgage rates are low, financing costs are only one of the components that go into the decision to purchase a home—and one's employment outlook is a much bigger factor. Although the unemployment rate has improved, it remained disconcertingly high at 9.7 percent in May. As such, many consumers may not have the confidence in their financial wherewithal to buy a home.

What's more, the weak application figures suggest that the housing market may be in store for a rocky few months, Gumbinger says. Fewer mortgage applications should lead to less sales activity and put prices under renewed pressure. "We are probably going to be in for a very slow summer even though interest rates are going to remain at pretty fabulous levels," he says. "Until you really start to have job growth again, and start to put incomes back together again, it's hard for families to get out there and jump in [to the housing market]."