At first glance, purchase mortgage applications appear to have the right ingredients in place to rise, especially after recent strong growth, according to a new report from Capital Economics.

So what’s suffocating mortgage apps? Earnings growth and a lack of affordability.

“The first quarter’s recovery in mortgage applications for home purchase appears to have been derailed by a lack of earnings growth and the resulting deterioration in affordability. While earnings should pick up, rates are also poised to rise, suggesting that it may take some time before we can declare that the recovery in mortgage applications is complete,” the report stated.

According to the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending Sept. 4, 2015, mortgage applications decreased 6.2% from one week earlier.

The seasonally adjusted Purchase Index decreased 1% from one week earlier. 

The number of mortgage applications for house purchases started out strong, increasing by 20% between the end of 2014 and April 2015, but it has disappointed of late.

And despite some evidence that demand had begun to pick up in late August, applications ended up falling in the first week of September.

Here’s what is faring well for purchase mortgage applications according to the report.

  • GDP growth rebounded strongly in the second quarter.
  • The labor market has been improving steadily. Granted, the increases in non-farm payrolls have been slightly less impressive in recent months, but the unemployment rate hit a seven-year low of 5.1% in July. That means the Fed has achieved the ‘full employment’ part of its dual mandate.  
  • Total home sales have surged in recent months. Given that mortgage applications have also stalled, the data seem to imply that activity among cash buyers has risen, perhaps because credit conditions have tightened.

The Capital Economics report referenced the July Housing Survey from Fannie Mae, which showed that consumer attitudes toward the home-buying environment stumbled despite positive home-price change expectations.  

The percentage of consumers who believe it is a good time to buy dropped to 61%, an all-time survey low­.

According to report, one possibility for why buyers are cautious is the lack of homes for sale.

“In addition, while unemployment is low, the share of part-time workers who want to work full-time is still high. That implies a degree of slack in the labor market. The result has been subdued earnings growth. Combined with further rises in house prices over the past couple of years, that has led to a modest decline in affordability which, in turn, has tracked buyer sentiment lower,” report said.

The future doesn’t look too bright since mortgage rates are poised to rise and house prices are set for further gains.

“Set against that, however, we expect earnings to start to pick up. And with the pace of rate rises set to be gradual and affordability still favourable by past standards, we are hopeful that the earlier recovery in applications will resume over the next few months,” the report stated.