Are Rising Mortgage Rates Already Deterring Home Buyers?

Mortgage rates are back up over 7% this morning following very strong economic growth data. When the economy is stronger than expected, and job growth is stronger than expected, the bond market assumes that fewer rate cuts are coming. The 10-year bond yield jumped back over 4%, and that pushed mortgage rates higher too. Mortgage rates are 40 basis points higher than a month ago, and 100 basis points higher than a year ago.

How will this impact buyer momentum?

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I’m Mike Simonsen, I’m the founder of Altos Research. Let’s look at the data for the week of February 5, 2024. Please refer to the video below for all the charts I mention in this transcript!

Inventory

It’s the spring buyers market and inventory is falling each week. This is not uncommon in February and especially in the last few years inventory would fall into March or April. The season seems to have shifted later in the year. 

So inventory is falling each week. There are more buyers than sellers. However every week for several months inventory continues to build relative to last year. We have slightly more sellers now than we did a year ago and inventory is now 8.8% more than last year at this time. There are 497,000 single family homes unsold on the market across the US.  That’s 5800 fewer homes on the market than last week.

While interest rates are off their peak of a couple months ago when they were over 8% for the 30 year fixed mortgage. Rates are still very high. The fact is that the economic and jobs data keeps coming in so strong that the bond market has pushed mortgage rates back up again. As of Monday February 5th the 30 year fixed rate is 7% again. That’s higher than a year ago. It’s higher than it was a month ago and if you’re paying attention you know that rising rates creates rising inventory. 

Here’s what we are showing in this chart. 10 years of inventory trends. I’ve highlighted in green the periods of when mortgage rates were falling, and you’ll see that inventory was also falling at those times. In 2020, rates fell dramatically and inventory fell dramatically. Now in the last two years, we’ve been in a generally rising interest rate environment. And as a result inventory is rising over the last two years. There are 8.8% more homes on the market now than last year. And mortgage rates are 100 basis points higher. 

In this chart at the left end you’ll notice that we used to have well over a million single family homes on the market at any given time. If you’re interested in when we get inventory back to those old normal levels, it’ll take a few years with these conditions of higher mortgage rates to get there. A few years. If on the other hand rates fall back down, buyers will gobble up more homes, and available unsold supply will shrink again. These are some of the details we’ll cover in more depth in the webinar.

Sales Rate

Each week just a few more home sellers are testing this market. There were 7% more new sellers this week than the same week a year ago. 44,000 new listings for single family homes this week. Plus another 11,000 immediate sales which were listed and are already in contract. The pace of new sellers each week remains incredibly restricted, but is showing signs of easing. 7% more sellers than last year is encouraging. But it’s not a lot. There are 28% fewer new sellers than in 2019. Each gray line here is a previous year with the new listings volume. January and February start low and usually climb pretty quickly, but the dark red line for this year is only barely above last year. And last year we saw the fewest-ever sellers. 

We have few sellers not because rates are high now, but because they were so low for the last decade. Each year with higher rates means 5 million more people have a higher cost basis in their homes and are more likely to resell it. So you can see why it’ll take several years of higher rates to get sellers to come back to the market. If rates fall again, that creates more homeowners who don’t want to sell. 

So look this year for continued expansion on the number of sellers. Hopefully we get to 10% or 15% growth over 2023. We’re at 7% growth right now. That will allow more transactions to complete and create a healthier housing market.  I’ll repeat, higher mortgage rates leads to more inventory.

Meanwhile the new contracts each week are greater than last year but struggling to really break out into growth. This week saw 56,000 new contracts for single family home sales, including 11,000 immediate sales. That’s 2% more than last year. Any growth is good, but this is barely growing now. 

The year-over-year growth rate in pending sales was much stronger in December than it was in January. We’re showing a tiny bit of sales growth over last year. Still, there were more buyers than sellers this week, inventory is falling. It’d be really nice to see the 10-15% sales rate growth that we saw in December. It seems to me that potential is there, especially because we had so many sellers hold off selling in the last 18 months. But after a month of rising mortgage rates, the market momentum has slowed.

Home Prices

Meanwhile home prices continue to show no signs of abating even in the face of these stubbornly high mortgage rates. The median price of single family homes in the US is just under $425,000. Home prices climb in the spring of course and this year is no exception. Home prices remain a few percent higher than last year at this time. So far this year there have been no signs of home prices retreating. No strong price increases in the data either. As mortgage rates jump, that scenario grows less likely. The dark red line is the multi-year path for home prices in the US. I’ve added the dotted line so you can see that home prices are a few percent higher than last year at this time and likely to hit new all time highs in May. 

The price of the new listings is the bright red line. New Listings this week came in at $399,000 which is roughly unchanged from last week and 5% greater than last year at this time. New listings prices continue to reflect a market with sufficient buyer demand for the available supply. In February a year ago we were seeing year over year declines in the new listings price which led to home price declines in April May and June. Pricing pressures a year ago were negative, now they’re positive. 

Prices in some ways are the slowest indicators in all the Altos data. We have all these ways to measure subtle shifts in supply and demand but home sellers have some inertia on their asking price once the house is listed. So it takes longer for those demand shifts to show up in the price data, and even longer to show up in the closed sales prices. Homes that are on the market now get offers in February and March and the sales finally close in April. 

Price Reductions

On the other hand, the price reductions data is very sensitive to changes in home buyer demand. When mortgage rates jump, fewer offers get made, so some sellers cut their prices. This happens immediately with a spike in mortgage costs. Currently 30.6% of the active sellers have felt the need to cut their asking prices from the original list price.  That’s in the normal range for this time of year and implies so far this year people are buying homes at these prices. Demand is not cratering. I’ve highlighted the gray band here so you can see the normal range. Normally about a third of sellers take a price cut before they get an offer. In this chart every line is a year. This year’s dark red line is starting at the left end of the chart. 

And if you look closely and compare the slope of this year’s line with last year’s red line you can see them converging a bit. Mortgage rates a year ago fell in January and buyers who were shopping took advantage. Mortgage rates rose this January. And the price reductions data shows a little sensitivity to that. Last year the market was finding its bottom. This year is a slower expansion.

I point this out because it really illustrates how to measure the consumer sensitivity to mortgage rates. This week as mortgages jumped back over 7%, I expect we’ll see a slowdown reflected in the price cuts data soon. 

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