Are high mortgage rates finally impacting demand?

While we still hear anecdotes about multiple offer scenarios in much of the country, and inventory is still super tight, we’re starting to see a slight slowdown in the sales rate, and a few more price cuts across the country. It sure seems like we can see the impact of a month of 7% mortgage rates very subtly in the data now.

Mortgage rates have been stubbornly high around 7% for a month. And we already had an affordability challenge compared to 18 months ago, so every move higher with mortgage rates eliminates some demand from buyers. Buyers all year have been surprisingly resilient compared to last fall, so what we’re looking for is where that affordability threshold starts to turn the market down again.

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I’m Mike Simonsen, I’m the founder of Altos Research. Let’s look at the data as we approach the peak of home buying season in mid-June 2023.

Inventory

There are now 451,000 single family homes available unsold on the market across the US. That’s up 1.8% from last week. Supply of homes for sale remains incredibly restricted. Remember that we started 2023 with 70% more homes on the market than a year earlier? There are now just 7.7% more. This gap has been narrowing every week all year. If mortgage rates spike, home buyer demand seems very sensitive and poised to slow again. We could lose the momentum very quickly. Last summer in September rates spiked to 7.5% and at that time we had a very unusual inventory jump and price decline late in the year. So keep your eyes out for that. If rates fall from here, expect resumed bidding wars for the end of the summer and declining inventory even further.

As of right now we are expecting to finish 2023 with 10 percent fewer homes on the market than we started the year. We’ll see how that projection changes in the second half of the year if these trends hold or if new macro forces take over.

Price Reductions

We always look for weakness in demand to show up in the price reductions data. And after a month of 7% mortgage rates, we might just be seeing the first inklings of that weakness this week. Price cuts have been very slow to rise this year as we’ve had more demand that supply of homes. And while last year at this time you could see dramatic cooling in the market, this year is much more subtle. 31.4% of the homes on the market have taken a price reduction. That’s up 70 basis points from last week. Last year’s weekly change was 170 basis points. In previous years we might see 50 basis points change in the middle of June. So this week’s change means slightly more price cuts than recent weeks and also slightly more than many of the pre-pandemic years. Though price cuts are rising much more slowly than last year at this time.

In this chart, the dark red line is the curve of price cuts for this year. (Note: watch the video at the top of this post to see all the charts I refer to, or click here to watch on YouTube). When we look at all the homes on the market, how many have taken a price cut? The steepness of this line is how quickly the market is changing. Last year’s light red line was rising super steeply. From that slope we could tell that demand had stopped, and that home sales prices would be declining in the future months. That’s not true today, though like I said, maybe we see the first signs of a changing market.
 

Home Prices

Home prices are at their peak for the year at $455,000 for the median price of single family homes. That’s basically unchanged from last week and about 1% below where it was last year at this time. Ultimately if home prices finish 2023 unchanged from 2022 is about as positive as could be imagined coming into the year. The prices shown here are the median for all the single family homes on the market. This leads the future sales prices because these are homes that are on the market now and will sell in the future.

The median price of the new listings is $419,500. That's the light colored line here. I’ll be watching this leading indicator to see if by July it isn’t back above the 2022 level. In July last year, that’s when home prices took their first big step down. July is always seasonal down steps for the new listing prices so we’ll see how steep the change is this July. Do homebuyers keep up their momentum from the first half of the year or do they stop as quickly as last year.

Meanwhile the price of the homes in contract is now $385,000 which is up over 1% for the week and is now also unchanged from a year ago. The price of the homes in contract was falling by this time last year and it’s still rising now, so this is momentum of market demand from the spring and is a signal of price support for sales that will complete in July and August.

Pending Sales

When we look at the total rate of those new sales though, it’s dropping. We’ve passed the annual peak of sales volume and this is one of those places we can see the impact of higher mortgage rates. There are now 386,000 single family homes in contract with only 65,000 new pendings this week. The new sales rate is 21% fewer than last year at this time. That’s going the wrong way. I’ve been optimistic that we’d close the gap with the sales rate from last year by the third quarter, but now it looks like if we stay in a world where mortgage rates are 7%, that looks like it’s not going to happen. Sales rates slow enough that transaction volume isn’t accelerating any more.

In this chart each bar is the total number of homes in contract at any given week. The light portion of the bar are those newly in contract. At the far right end of the chart you can see how that sales rate is declining. This is a signal of the impact of those mortgage rates.

Immediate Sales

If you follow these videos you’ll know I talk about immediate sales - those homes that get offers within hours or just a couple of days after listing. In the 4 weeks since mortgage rates spiked, the percent of new listings that go immediately into contract has ticked down every week. Just a little slower, an indication that buyers are slightly less eager to snap up the homes as they get listed.

When I want to understand if demand is weakening, I like to look at the percentage of the new listings which go into contract immediately.  This chart is that percentage over time. I’ve highlighted last year where demand was freezing up and you can see the immediate sales percentage was plummeting. I’ve also pointed out where last September the immediate sales rate hit its low point exactly when rates spiked the highest. The likelihood that your listing would get same-day offers climbed this spring, but like clockwork with the latest mortgage spike a month ago, those offers have slowed. See at the far right side of the chart, four weeks in a row of a declining rate of immediate sales. Each week a few more people decide not to bid on that house, preferring to wait to see if money gets cheaper first. 

To many sellers, they don’t notice this yet. The best homes at the right prices still have buyers but you can start to put together the pieces. Each week a few fewer people make those bidding wars, a few fewer homes go into contract. Those that didn’t get their offers a few more of them do a price reduction. That means slightly less price support for sales prices in the future. These are subtle changes in demand but they’re worth watching as we try to understand whether this year’s minor resurgence in the housing market has legs or whether it will whither at the slightest jump in the cost of money. 

This is of course national data, and local markets are behaving very differently from each other right now. If you need to get your local data to your buyers and sellers right now, you should join us at Altos Research. Go to AltosResearch.com and book time with our team to learn how to interpret the market signals for the people who need it most right now. They need you to be the expert for them.

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