How Quickly Will Higher Mortgage Rates Impact Home Buyers This Spring?

How quickly will higher mortgage rates impact the surprisingly resilient home buyers this spring? The interest on a 30 year fixed mortgage today is approaching 7% again. Just a few weeks ago, we’d dropped just under 6%. An almost 100 basis point move in rates has a significant impact on payments and affordability. You have to assume that means fewer buyers in the market.

The question is, where in the data do we see it first? How long does it take for higher mortgage rates to sink in before those buyers back off? 

Well, we did observe fewer homes go into contract this week as new pendings, and that’s perhaps a sign. Buyers who have been active in the market already this year, now maybe they’re saying, “Since rates jumped from 6 to 7%, maybe I’ll wait to see if they fall back down before I lock in my payment." Slightly fewer homes take offers and go into contract. We can see that maybe the first datapoint in the pendings data this week. 

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I’m Mike Simonsen, I’m the founder of Altos Research. Here’s the latest data for the second full week of February.

Pending Sales

As I mentioned, new pendings are 6% fewer this week. We tracked 55,000 single family homes go from active listings into contract this week. That’s down from 58k last week. This is one data point. But if you were to look for signs that homebuyers react to a sharp increase in mortgage rates, this is where you’d see it.

If your potential payment jumps big in one week, then maybe you hold off and don’t make the offer. Remember this is the opposite of what was happening last year in February. When rates were still in the 3's but obviously headed higher. At that time buyers knew they had to accelerate their offers. Now maybe you wait.

While this week we had slightly fewer new pendings, we also had fewer completed sales for whatever reason. And the total pendings count continues to climb higher. Like last week, we have 23% fewer homes in contract now than we did at the tail end of the pandemic buying frenzy last year.

Inventory

And active inventory is still falling each week. Available inventory of single family homes for sale in the US fell by 1.5% this week to 436,000. This is a market where sellers are very hard to find. We have some demand, and few sellers so inventory is falling.

The weekly inventory decline is slowing, meaning that supply demand imbalance is getting better as we get later into spring. My guess is two more weeks before we see the bottom of inventory for the year. If inventory keeps falling into March that would be the next surprising development of an already surprising new year in housing.

In normal years before the pandemic, inventory would be climbing by this point so this is why we’ve been surprised at how resilient the housing market has been this year so far.  I’ve highlighted 2019 here, The low point of inventory in 2019 was earlier in January and again in early February. By this point in February 2019, inventory had been climbing for a few weeks and there were over 820,000 single family homes on the market.  Almost twice what is available for buyers today. So we used to have much more supply and it would be growing by now. As recently as New Years I expected this year to behave much more like 2019 than 2022, but I was simply wrong. 

Here’s how you know this market’s inventory crunch is from a dearth of sellers. There were only 55,000 single family homes newly listed for sale this week. That’s 24% fewer than last year as this time. Last year we also still had the pandemic bidding wars and immediate sales. So where last year we had not many sellers and huge demand, this year we have even fewer sellers and modest demand. 

Home owners in America are holding onto their ultra-cheap mortgages. Why sell the best financing deal ever? Even if I’m buying a new home, I’m not giving up the existing home that has a 2-3% mortgage. I think that’s what’s going on here. We can hypothesize that American homeowners are locked into their ultra-cheap mortgages, and we can also see it play out in the data.

Price Reductions

We don’t yet know how completely 7% mortgage rates will cut off demand this spring like they did last fall. We have plenty of buyer momentum, and we can see in the price reductions data. Currently 31.3% of the homes on the market across the US have taken a price cut. This shows dramatic improvement in the relative levels of demand from last fall.

In “normal” times, about a third of the market 30-35% take a price cut before they sell. In recent years, March is the fewest price cuts because that’s when all the new inventory lists... so as a percentage, fewer have taken a price cut. Then in Q2, if they haven’t sold, price cuts start climbing. The last two years of pandemic craziness meant that only 15% of the market took price cuts. We had bidding wars and insatiable demand. Then last summer we could see abrupt change in demand. Stopped cold. Now we see the inverse happening.

While we have more homes on the market now with price cuts than any recent February, see the slope of that curve shows us how quickly this market is returning to normal.

Now, what if rates stay at 7% or go higher? They could go higher because the economy keeps reporting such strong growth numbers on almost all fronts. So watch price reductions as a gauge of how quickly demand gets cut off. The dark red line will curve flat and then start rising. Does it get under 30%? Do we get back into this cluster of all the recent years? Or does it reverse and head higher like last year?

Home Prices

One reason sellers don’t have to cut their price is that they’re starting at more reasonable asking prices. The median price of single family homes in the US this week is $419,900. That’s up just a fraction of a percent from last week. Home prices always climb in February, but this year’s slope is very modest. Last year prices were spiking each week because sellers knew that the buyers demanded it.

You can also gauge the future of home sales prices by watching the price of new listings. At $393,000, the price of the new listings is essentially unchanged from a year ago. Home prices are already flat from a year ago. In the next few weeks I expect it to be below where it was a year ago. That’s why we can pretty confidently say home prices will be at best flat for 2023. Even as the supply demand imbalance exacerbates, the demand is at very clear price points. Affordability is an important factor for home buyers. And you can see it playing out here.

This is of course national data and the 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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