Mortgage Applications Spike When Rates Fall

Article originally posted on CoStar on April 5, 2023

Prospective Homebuyers Show Willingness To ‘Buy the Dip’

Steadily rising mortgage rates throughout last year put a damper on home purchases. Rising home prices coupled with higher financing costs priced many potential buyers out of the market. But so far this year, rates have failed to find a consistent direction and have seemingly topped out.

Events in the larger economy, such as turmoil in the banking sector, reports of higher inflation than expected, or developments in budget negotiations underway in Washington, buffet mortgage rates from week to week. The Mortgage Bank Association’s weekly applications survey has shown 30-year fixed rates this year ranging from 6.18% during the week ending on Feb. 3, about the time when the Federal Reserve downshifted its policy rate increase to 25 basis points, to 6.79% during the week ending on March 3, when higher-than-expected inflation data led many to think the Fed was more likely to increase rates by 50 basis points.

The recent volatility in mortgage rates has helped prospective home buyers who have been waiting to “buy the dip.” In weeks when mortgage rates have fallen, mortgage applications have spiked. The result is a number of buyers who have locked in favorable rates in the 6% to 6.25% range, at least for the next few months.

Sellers, meanwhile, have taken two approaches to the recent housing market swoon. Some have accepted that valuations are no longer at peak levels and agreed to lower offers, which has led to an increase in transactions. Existing home sales grew by 14.5% in February to a seasonally adjusted annual rate of 4.58 million, according to the National Association of Realtors. February marked a six-month high, although sales were 18.7% below pre-pandemic levels in February 2020. And the median existing-home price fell by 0.2% from February 2021, ending a 131-month streak of year-over-year positive change.

Sellers who have not compromised on pricing are seeing their homes remain on the market for longer, while some are putting off listing homes altogether. In total, there were fewer than 1 million homes for sale at the end of February, according to the National Association of Realtors, a month that tends to have the least number of homes on the market due to seasonal trends. After adjusting for seasonality, for sale inventory was 17% higher than its trough in February 2022 but still roughly 30% below pre-pandemic levels in February 2020.

In contrast, sales of newly built homes continued to edge higher as developers have endured market challenges for much longer and have been generally more accommodative than homeowners by offering incentives to clear their inventories before conditions deteriorate further. Sales of new homes rose by 1.1% in February to a seasonally adjusted annual rate of 640,000 according to the Census Bureau. Builder confidence has improved throughout the year as the lack of existing homes for sale has boosted traffic of prospective buyers of new homes. The National Association of Home Builders Housing Market Index climbed from 31 in December to 44 in March. In its survey, 31% of builders reported that they reduced home prices in March and 58% provided some type of incentive.

With the summer selling season less than three months away, transaction activity will likely continue to hinge on mortgage rates and available inventories. Home prices are easing in many markets but homebuyers will continue to face affordability challenges as incomes are no longer rising at the pace seen during the early days of the pandemic.

The National Association of Home Association of Realtors’ housing affordability index, which measures the ability of a typical family to earn enough income to qualify for a mortgage loan for the purchase of a typical home, has remained below its 2006-trough levels since May 2022 (after seasonal adjustments). The latest seasonally adjusted reading in January at 96.8 is a modest improvement from 91.2 in October, but for affordability to return to its pre-pandemic level, mortgage rates and prices would need to fall significantly.

What We’re Watching …

The monthly jobs report for March arrives this Friday and is projected to show around 220,000 job gains over February, which would be the fewest number since December 2020. This is the final employment report before the Federal Reserve’s policymaking committee meets in early May, when it may decide on another 25-basis-point increase in its overnight lending rate, so an upside surprise here will likely cement that course.

Hiring remains fairly robust and jobless claims low, indicating a continuation of tightness in the labor market, but that is certain to weaken as the economy slows amid higher interest rates, tighter credit conditions and still-elevated inflation.