Total mortgage application volume fell 4.1% from the previous week, but were 16% higher than a year ago. The average loan amount for homebuyers hit another record high — $395,200, according to the Mortgage Bankers Association's seasonally adjusted index reported by CNBC. 

Homebuyers are seeing prices rise at the fastest rate in over six years, as highly emotional, pandemic-induced demand for housing butts up against a record low supply of homes for sale, resulting in bidding wars.

"Since hitting a recent low in April 2020, the average purchase loan amount has steadily risen – in line with the accelerating home-price appreciation occurring in most of the country because of strong demand and extremely low inventory levels," said Joel Kan, an MBA economist.

Homebuyers also tend to be less sensitive to small moves in interest rates. After setting more than a dozen record lows last year, mortgage rates began to edge slightly higher to start this year. Applications to refinance a home loan, which are much more sensitive to daily rate moves, fell 5% for the week but were 83% higher annually. Mortgage rates were 86 basis points higher one year ago, and that comparison is now shrinking, which could hit refinancing demand harder in coming months.

"In a sign that borrowers are increasingly more sensitive to higher rates, large declines in government purchase applications and refinance applications pulled overall activity lower," Kan said. "The refinance index has now declined for two-straight weeks."

Potential impact of $15K homebuyer tax credit

The housing industry is keeping a close eye on the Biden administration's proposal of a $15,000 first-time homebuyer tax credit, as reported by HousingWire. If passed, the funds could be accessed immediately by the buyer at the closing table. Now that both Senate races went to Democrats, Biden's tax credit is becoming more of a possibility.

Ralph DiBugnara, president of Home Qualified and senior vice president at Cardinal Financial, anticipates a positive impact of the tax credit, but is still wary of parts of the bill, which includes an increased rate on long term capital gains.

"The real estate market is so hot that hurting investors now may not have a big effect, but long term it could cause major issues," DiBugnara said. "Real estate Investors tend to buy more real estate even in bad markets as a long-term strategy. If it becomes more expensive for them to do so, because of taxes, I believe some will shift strategies long term so when the market cools there will be a lot less of them to support home buying."

Lawrence Yun, chief economist at the National Association of Realtors, thinks Biden's homebuyer tax credit won't help with the already low supply of homes available.

"Only with added supply will the homebuyer tax credit be effective in boosting homeownership and enlarging the middle class," said Yun. "Without supply, home prices jump much higher with no meaningful gain to new homeownership."

The future of bonds and the Fed

The Federal Open Market Committee left future economic policies virtually unchanged at its Wednesday meeting, indicating that short-term mortgage rates will stay low for years to come, according to HousingWire.

As for asset purchases, the FOMC also made clear that the committee is waiting for "substantial further progress" on economic recovery before they begin to taper their bond purchases of $120 billion a month. Overall, Federal Reserve purchases have helped to drive mortgage rates and other loan interest rates to the lowest level on record by boosting competition for bonds, which compresses yields.

Though the Fed has not set a date for tapering its purchases, in a Wednesday press conference, Fed Chairman Jerome Powell reiterated the Committee's intent to keep interest rates low until labor market conditions and inflation hit the FOMC's standards of maximum employment and inflation moderately exceeding 2% for some time.

"The announcement of such a change in plans would impact market rates well in advance of the actual change," said Mortgage Bankers Association Chief Economist, Mike Fratantoni. 

But Powell said the whole focus on exit is premature. "We're focused on finishing the job we're doing, which is supporting the economy, and giving the economy the support it needs," Powell said.

Weekly mortgage rate update

As the market reacts to a new administration in Washington and COVID-19 driven economic malaise, mortgage rates continued to decrease this week, just slightly. Even as house prices increase at the fastest rate we've seen in years, competition to buy is strong – given the low inventory that exists across the country. The fact that there are not enough homes to meet demand is going to be an ongoing issue for the foreseeable future.

The Freddie Mac weekly survey shows the average rate for a 30-year fixed mortgage is 2.73%, which is down 0.04 points from last week, and down 0.78 points from this time last year.