Mortgage rates are super-cheap, so why aren't more people borrowing?

Though mortgage rates have dropped to fresh all-time lows in a couple of closely watched surveys, lenders say the rush to apply for loans has slowed. New data shows the demand for mortgages was down last week, despite the home loan deals that are available to homebuyers and homeowners.

What gives?

The housing market is throwing up barriers that are frustrating some would-be borrowers, while others may be wondering where rates will go from here, a major lenders trade group says.

Mortgage demand cools off

Overall mortgage applications were down 1.8% in the week ending June 26, in spite of record-low mortgage rates, the Mortgage Bankers Association, or MBA, said Wednesday.

The MBA says it finds 30-year fixed-rate mortgages are averaging an all-time-low 3.29%, but other reports say today's typical rates are way lower. On Thursday, mortgage company Freddie Mac reported that 30-year rates this week are averaging 3.07% — a new record low in its nearly 50-year old survey.

And Mortgage News Daily says it has surveyed lenders and found that average 30-year rates have dropped below 3% and are back at an all-time low reached in mid-June.

Rates have been plunging because the explosion of coronavirus cases in the U.S. has become a major worry for the financial markets, explains Joel Kan, the associate vice president of forecasting for the Mortgage Bankers Association.

"Investors are contemplating the risks of the recent resurgence of COVID-19 cases to the labor market and economy, and Treasury rates and mortgage rates are moving lower as a result," Kan says. Mortgage rates tend to follow the interest, or yield, on 10-year Treasury notes.

Demand has softened both for mortgages used to buy homes and for refinance loans. The number of so-called purchase applications slipped 1% last week while refinance requests dipped 2% from a week earlier.

Homebuyers find roadblocks

Purchase mortgage applications were down for a second straight week, Kan notes.

"The weakening in activity is potentially a signal that pent-up demand is starting to wane and that low housing supply is limiting prospective buyers' options," he says.

Many house shoppers are coming up empty-handed, because the number of homes listed for sale nationwide in June was down 27.4% from a year ago, according to Realtor.com.

"Buyers are out in force and serious about finding a home. Although the new listings trend has improved, inventory continues to decline," says Danielle Hale, Realtor.com's chief economist. “The housing market has certainly demonstrated its resilience during the COVID pandemic, but conditions vary market by market."

Supplies are so tight that more than 4 out of 10 Americans who bought homes between January and May report they had to engage in a bidding war, says a recent study from Clever Real Estate.

The shortage of houses on the market is putting pressure on prices, with the MBA reporting that the average loan size for purchase applications rose to a record high last week.

Homeowners shrug and wait

While refinance applications from homeowners last week were up an impressive 74% from the same week in 2019, refis accounted for a slightly smaller share of all mortgage requests compared to a week earlier.

"It is possible that many borrowers have already refinanced or are waiting for rates to go even lower," says Kan.

Even so, plenty of homeowners are still missing out on the chance to sharply reduce their monthly payments and lifetime interest costs by refinancing into a new mortgage with an extremely low rate. Some 14 million are good refi candidates and could save an average $282 per month, mortgage data firm Black Knight recently reported.

As for waiting for even lower rates, experts say "timing the market" like that is a risky move. Matthew Graham, chief operating officer of Mortgage News Daily, says rates are likely to stay down only until the coronavirus outbreak has been brought under control.

"If more people can return to work without hospitals being overwhelmed, the less resistance there will be for interest rates and stocks to move higher," Graham writes. "In fact, it's safe to say that WILL happen. The question is 'when?'"

So, if you're a homeowner sitting on a mortgage with a rate in the neighborhood of 4%, don't wait too long to replace it. Go online, look at mortgage offers from multiple lenders, and if you find a rate that would work for you and provide substantial savings, grab it.

Be sure to use the same method when the time comes to buy or renew your homeowners insurance. You can easily get home insurance quotes online from several providers, so you can compare them and find the best policy for you.