According to CNBC, Applications for a mortgage to purchase a home fell 3% for the week and were 2% lower than a year ago. This is the second straight week that purchase demand was lower than a year earlier, even though mortgage rates are still lower.

Pending home sales, which are counted by signed contracts and are therefore an indicator of future closed sales, dropped a wider-than-expected 4.4% in April, according to the National Association of Realtors.

High prices and low supply are finally taking some of the heat out of the housing market. Buyers are clearly starting to hit an affordability wall. This is especially clear from the government loan demand. FHA and VA loans offer low or even no down payment options for borrowers with lower incomes and credit scores.

“Tight housing inventory, obstacles to a faster rate of new construction, and rapidly rising home prices continue to hold back purchase activity," said Joel Kan, an MBA economist. "The government purchase index declined to its lowest level in over a year and has now decreased year over year for five straight weeks.

Mortgage rates are holding steady to start this holiday-shortened work week, but economic data out later this week could change that. The all-important monthly employment report for May is coming Friday, and depending on the outcome, rates could swing in either direction.

Biden tax credit to rehab homes is finally unveiled

The Biden administration announced proposals to combat the racial wealth gap, including a tax credit to rehab homes for low and moderate-income homebuyers as part of the trillion dollar infrastructure package, according to HousingWire. The provisions are the Biden administration's latest effort to combat the racial wealth gap, which Fudge called attention to during recent remarks to the Mortgage Bankers Association.

The Biden administration's plans to narrow the wealth gap are becoming clearer, although the American Jobs Plan must still be hammered out in Congress. HUD plans to launch a "first-of-its-kind interagency effort" to combat inequity in appraisals, according to a White House press release. HUD has also taken steps to craft a rule on the legal duty to Affirmatively Further Fair Housing. The agency has already sent both the proposed rules to Congress for review.

President Biden also announced the Neighborhood Homes Tax Credit, which would incentivize the rehabbing of outdated homes. Investors who acquire and renovate older homes could claim the credit on their federal tax returns, as long as the home is sold to and occupied by an eligible buyer. In order for investors to qualify for the credit, buyers must make no more than 140% of the median income for the area.

The tax credit would cover the difference between total development costs — including acquisition, rehabilitation, demolition and construction — and the sales price. The renovations would be on a budget, however. The final sales price could not exceed four times the area median family income.

Each state's housing finance agency would administer Biden tax credits, which would be allocated by population. Developers, lenders or local governments could compete for the funds through an application process.

How to avoid overspending in this hot housing market

In this hot housing market, it can be easy to blow your budget. That's why you have to have a clear plan in place before you start looking for your next home, experts say.

Competition is tough due to low inventory of housing on the market. That means there are often bidding wars, driving up house prices, according to CNBC. Thirty-nine percent of pandemic buyers exceeded their original budget for their new home this past year, according to a recent Realtor.com survey. Yet getting caught up in the competition could have a dire impact on your finances.

Here's how to make sure you don't overspend in this competitive market.

• Your pre-approval is not your budget.

Your housing budget should include not just what you are paying in monthly mortgage principal and interest, but also overall housing expenses such as property taxes, insurance, maintenance and possibly homeowner association fees. Ideally, you want those total expenses to land between 25% to 35% of your income. 

• Have an emergency fund in place.

In addition to your down payment, have an emergency fund in place for any unexpected expenses. Even if you don't have the generally suggested three to six months in expenses saved, make sure you have something established before you buy a home, Wright said.

• Anticipate hidden costs.

There will be other costs associated with getting into the home such as moving expenses, furniture or potential upgrades or renovations. Be realistic about those costs. Forty-eight percent of those recently surveyed by Ally Home said they wish they had been more prepared for the cost of home repairs.

• Only look at homes in or under your budget.

Once you have a budget, only look at homes that fit into it — or come in under it, Holbert suggests. "Most likely the houses you are looking at will go above listing price," she said. "If you look at homes a little lower than your budget, it will give you flexibility to make competitive offers."

• Keep an eye on interest rates.

While interest rates have been near historic lows, they fluctuate up and down. That means they can rise in between the time you get your mortgage pre-approval and the time you close. Even a small move higher in rates will mean a larger monthly payment.

Weekly Mortgage Rate Update

Home prices continue to accelerate while inventory remains low and new home construction cannot happen fast enough. There are many potential homebuyers who would like to take advantage of low mortgage rates, but competition is strong. For homeowners, however, continued low rates make refinancing an option worth considering.

The Freddie Mac weekly survey shows the average rate for a 30-year fixed mortgage is 2.99%, which is 0.04 points higher than last week, and down 0.19 points from this time last year.