Mortgage Rates Continue To Climb, Deterring Potential Homebuyers

The same trends of the last few weeks are still dominant this week. Mortgage rates continue to climb. It’s not uncommon to hear rates quoted over 8% for a 30-year fixed mortgage. Conventional home buyers, those that stretch to make a down payment, are in an increasingly tight bind. It’s not a surprise that they are sitting on the sidelines.

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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 October 9th. Please refer to the video below for all the charts I mention in this transcript!

Inventory

There are now 537,000 single family homes on the market across the US. That’s up a fraction from last week. Inventory continues to grow faster than last year at this time. And it hasn't peaked for the year. Mortgage rates are also still climbing, with 8% common now, so buyers are priced out and homes sit longer. Remember that higher rates equals more inventory, and lower rates equals less inventory. The path to finally having more selection for homebuyers is through higher mortgage rates. Higher for longer. If mortgage rates were to fall between now and January, expect to see inventory falling again next year, like it did for most of this year. If rates stay at 8% or higher, expect to see inventory rise in 2024.

Inventory is climbing faster than last year at this time. I’ve used the long time series chart for a slightly different view of inventory trends today. You can see not that long ago there’d be over a million single family homes on the market in October. Last year, inventory spiked quickly when mortgage rates spiked quickly. Then a second rate shock in September last year bumped inventory up again. This year inventory gained much more slowly most of the year. But now unsold inventory is piling up each week and it’s late in the year for that. There are probably a few more weeks until inventory hits the peak for the year.

The end of October is where last year’s inventory peaked. Two things happened at that point last year. First, once you get to November, fewer people are interested in selling before the holidays. They wait to list or withdraw the listing if there are no offers. So inventory falls even with weak demand. But also last year, the first week of November was the peak of mortgage rates for 2022. Once rates started falling again, inventory started falling, which set up for that surprisingly strong first half of 2023. This year, if mortgage rates don’t peak, and they keep climbing into November or through the holidays, we could see inventory keep climbing too. 

New listings volume each week remains very low, there are very few sellers who want to or need to sell into this market. And there is certainly no flood of sellers. 58,000 new single family listings hit the market this week. That’s roughly the same pace as the last few weeks and the same pace as last year at this time. This inventory build is from a dearth of buyers not from a surge of sellers. Both homebuyers and home sellers are waiting on the sidelines.

Sales Rate

There were actually more sales contracts started this week than a year ago. Sales have been consistently fewer all year long, but last October is when the brakes really slammed on. 58,000 new contracts for single family homes this week, that’s 8% more than the same week last year. There are only 327,000 single family homes in contract now. That’s shockingly few. So while the comparison to last year gets easier now, there are still no signs of the sales rate improving. And why would there be? It’s the most expensive time to buy a house in decades. Even if you’re a cash-heavy buyer, your selection is still not great. 

In this chart each bar is the total number of homes in the contract pending stage at any given moment. The light portion of the bar is the new pendings each week. Last year the light portion was shrinking dramatically each week. Fewer and fewer sales. This year the sales rate has been low, lower than last year. It’s late in the season so there are always fewer sales in October than earlier in the summer. This year’s October decline is less abrupt than last year. That’s just another sign that inventory is increasing because buyers are holding back, and homes are sitting on the market. 

One number that’s fascinating to watch is the proportion of listings withdrawn from the market vs. those going into contract each week. Withdrawals every year climb in the fourth quarter as we approach the holidays. Many of those homes will get relisted next year. What’s notable is that last October the withdrawals were happening at a much greater pace than they are now.  Last year some sellers were still surprised at how quickly the market had changed. At that time we saw only 52,000 new contracts with another 40,000 listings withdrawn. This year slightly more sales and about 25% fewer withdrawals. This year sellers are much more prepared emotionally. 

Price Reductions

Here’s a different view of price reductions than I usually share. There are now 37.5% of the homes on the market that have taken price cuts recently from the original list price. There are more price cuts now than in any recent year except last year. This chart illustrates the tight band for normal markets, how normally about a third of the homes take a price cut before they sell. When more than that need to cut their asking price, it’s because demand is weak. And that bodes bearish for sales prices in the future. That’s where we are now. See the far right end of the chart. A third of home sellers expect to cut their price, but 37.5% have had to do so. Last year that number was over 40% nationally in October. This illustrates how the downward price pressures now are less than they were in Q4 last year. Though remember that because inventory isn’t done climbing for the year, we can expect that price cuts are not done climbing either. Especially if rates keep climbing the market could grow as weak as last year. But it’s not there yet.

Another thing this view illustrates for us is the last time mortgage interest rates rose, back in 2018, we can see that price reductions at that time climbed as well. That was just a 4-5% move in rates. 100 basis points. Last year rates spiked 450 basis points and price reductions spiked. This year is another big move. Homebuyers hold back, sellers don’t get their offers, and so they start cutting prices. You can measure the relative levels of homebuyer demand by the change in price reductions. Right now it shows demand is lighter than any recent year, not yet as cold as last year.

Home Prices

The median price of single family homes across the country is now just under $440,000 though that’s basically unchanged for several weeks. While we can see the active market starting to feel price reductions with weaker demand, we can see in the dark red line here that the overall pressures on home prices is lighter than last year at this time. I think that’s because home sellers are much more prepared than they were last fall. 

Home prices are 1-2% higher than last year at this time. Given how quickly home prices felt the pressure last year, it seems likely that even while demand is weakening now, home prices will end the year with these slight gains over 2022. Last year home prices were falling each week pretty quickly - the market changed from hot to cold. This year the slowdown is much less dramatic. Price declines are part of the season of course, the best properties get listed with the best premiums in the second quarter each year and prices always decline in the fall and winter, but last year’s change was stronger than seasonal.

The median price of the new listings is $395,000. That’s also unchanged from last week and a couple percent higher than last year in October.  Last year the light red line was falling by 1% per week. That hasn’t happened as quickly this year yet. Thought it could. There is no sign of bullishness in the data, just easier comparisons with last year. But there’s also no sign of the bottom dropping out. We remain vigilant to see if or when home prices might have bigger moves lower.

The data where the comparison with last year is most stark is when we look at the price of the homes with sales contracts pending. These are not yet sold, but they’re no longer active on the market because they have offers. The dark red line here is the price of those newly pending each week. Last year that sales price was dropping precipitously. As rates jumped buyers downshift their price point and discounts kicked in aggressively. Last year had that September surge in rates and it hit home prices abruptly. This year the price impact is much less abrupt. 

The pending prices will fall again over the holidays. This is the earliest proxy for sales months before the sales are closed. This is why we can see that the headlines for the next several months will report year over year home price gains. Those sales are already in contract and those contracts are a couple percent more expensive than last year.  At the far right end of the chart, pending prices have not dropped substantially with this latest decline in buyer demand. And next we shift our focus to January when the new season starts fresh with the latest inventory and potentially new economic direction for the year.

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