Will Home Buyers Jump at Cheaper Mortgage Rates?

Mortgage rates are dropping fast. Will potential home buyers jump at newly cheaper payments? Or will they wait to see if rates drop further before taking action? 

Mortgage rates are at the lowest they’ve been in over a year. Last year at this time rates were rising, finally peaking at 8% in October 2023, which really slowed the housing market. With the 30-year fixed rate now under 6.5%, we'll be watching the data closely to see how demand changes over the next few weeks.

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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 August 5, 2024. Please refer to the video below for all the charts I mention in this transcript!

Inventory

There are now 684,000 total single family homes for sale on the market across the US. That’s up less than 1% for the week and is 40% more homes on the market now than a year ago. 

Last year as mortgage rates were rising last in the year, inventory was rising at 1-2% per week in August and September into October and rose all the way to late November. That was a very unusual time. Normally inventory will plateau in August and start declining by September.  You can see the late 2023 inventory build in this chart in the bright red line. Especially note that September increase in inventory.

If we get sustained lower rates this fall, will we return to the old seasonal patterns? That’s what I’m looking out for. I think we see some slowing in the growth of inventory. The slope is lower. Just under 1% growth this week down from 1.5 or 2% recently. 

The states that have been adding the most to inventory this year, Texas and Florida, may be at their peak now finally. There are still unsold homes building in those markets, but it looks like we could be nearing the peak. But for example Texas unsold inventory added just a fraction of a percent this week. Just a couple hundred homes on 28,000. Florida added less than 100 homes on 20,000. 

This is why while we’re currently at 40% more homes on the market now than a year ago, we still expect to finish the year up only about 20% over last year. Last year inventory built late, and this year should plateau sooner. The current lower rates trend supports that forecast.

New Listings

Most of the total inventory fluctuations have been demand driven this year. When rates rise, demand slows. Demand slows, inventory grows.  

Supply of sellers is the other side of the inventory equation of course. And when we look at the New listings pace, there’s no sign of a lot of sellers reaching the market. New listings volume ticked down to 67,000 single family homes hitting the market this week unsold. 

There were another 14,000 new listings immediate sales. Overall, only 4.6% more homes listed than last year at this time. There’s not a lot of sellers out there. Slightly more than last year, but seller pace is still very restricted. And this makes sense of course. If you own a home, you have a great mortgage, with a lot of equity. Very few people “must” sell. So if they’re looking at weak demand, sellers can hold off. 

The dark line for this year shows us here how there are still a lot fewer sellers than in any previous year except 2023. There’s no sign of that changing. 

This dynamic is going to be very important to watch over the next year. Does unemployment finally rise? The world has been expecting a US recession for 2 full years now. Even if it finally hits us, few American homeowners will want to sell their homes. Until we see new listings pick up, we should expect a cap on inventory growth. 

Pending Home Sales

The number of new contracts ticked up a couple percent this week to 66,000, with another 13,000 condo sales started. That’s a good sign, though it is still very low and in fact just fractionally lower than last year. Condo sales are significantly fewer than last year. 

Each of the last two years, as I’ve mentioned, faced sharply spiking mortgage rates in the back end of the year. We’re now in the opposite environment. If cheaper money motivates a few buyers to move off the sidelines, then we should see it here. This is the count of all the contracts started for home sales in a given week. These homes were on the market and are now in contract. 

This year’s dark line is still below the last few years. There continue to be fewer sales now than a year ago. Is it about to break above and show some year on year growth? Could be if the cheaper money conditions hold. That’s what I’m watching for. Home sales in the back half of the last two years have been particularly weak, so we’ll see if that trend breaks.

There are 379,000 single family homes total in contract. That’s down from last week, as the end of month closes a bunch of sales. There are a few percent more homes in the contract pending stage than last year. While some of these contracts will fail, most complete so the pendings are the earliest proxy for home sales. Homes are spending about 37 days in contract so these sales will close in August and September. 

Home Prices

The median price of the homes going into contract this week was $393,000. That’s a downtick of half a percent for the week and is about 3.5% more than a year ago. Home prices always ease in the second half of the year and we’re in that cycle now. 

I continue to expect that any boost we see in the market if rates stay lower will be in the inventory numbers with less impact on prices for now. If rates were to jump again, and they certainly could, then prices would be sensitive to the downside, like the pattern of 2022. In other words, buyer demand seems like it would be very easy to weaken, and slower to strengthen in response to mortgage rate changes. 

I don’t have a lot of evidence to support that assumption other than the pattern from 2022, which I’ve highlighted in the gray periods here. We know that demand is weak, that money is expensive and that if the cost of money jumps again, demand can freeze. So it feels to me like our home price trend will stay in the 0-5% appreciation range through the end of the year. It’s hard for me to see a scenario this fall where falling mortgage rates push prices notably higher. Though I could see that in the 2025 cycle if next year starts with significantly cheaper money.

The price of all the homes on the market is still hovering at $450,000, unchanged from last year. Some time in the next few weeks that number will start receding for the rest of the year. Prices cluster around the big round numbers so there are a lot of homes priced at $450,000 and the median falls in that group. 

The price of the new listings is $412,000, which is up 3.3% over last year. No matter how you measure home prices, they’re up just a hair over 2023 and that pattern looks stable. I continue to assume that the headline home price numbers like the Case Shiller Index will compress from 5-6% increases to under 5% as the year finishes. 

Price Reductions

We’ll be able to monitor any changes in home buyer demand with the price reductions curve. Currently 39.4% of the homes on the market have taken price reductions from the original list price. That’s up 40 basis points for the week, which is on the same trajectory as recent weeks. We haven’t yet seen any demand pick up as measured here. Though we can confirm that the market isn’t deteriorating. There are more homes on the market with price cuts than in any recent year. It’s not accelerating but it’s high.

It’s normal for price reductions to slow in August, plateau in September before declining for the holidays. This pace hasn’t really slowed yet.

As the market has remained so weak this year, I’ve been watching to see if price cuts would echo the 2022 slowdown. We’ve been talking about these sharply lower mortgage rates and if that motivates a few more buyers, we should see the price cuts decelerate from 40 basis points per week to 10 or 20. Keep your eyes here to understand how much, if at all home buyers come off the fences. 

It could be that this late in the season, that not many home buyers are motivated. Or they’re going to wait until the spring to see if rates are even lower then. That wouldn’t surprise me. But even in that case we probably won’t see deterioration in prices the way we did in 2022 and 2023. I imagine this gauge will peak at about 42% of the homes with price cuts. If demand picks up, that’ll be closer to 41. 

And that’s why we do this data work each week. Mortgage rates stayed higher for longer than anyone anticipated this year. Maybe we’ve finally turned the corner? If we’re lucky? For buyers and sellers, these conditions can change fast. They need to hear the data from you so they know how to respond. You should join us at Altos. 

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