Rates Take a Turn for the Worse in an Already Weak Housing Market

Article originally posted on CoStar on April 24, 2024

With the spring home-buying season now upon us, potential home buyers are facing difficult choices as they watch already-high mortgage rates and home prices climb further, and a portion are opting to stay on the sidelines until buying conditions improve.

The Mortgage Bankers Association reported that interest rates averaged 7.13% during the week ended on April 12, up from 6.43% during the same week last year. Mortgage rates have been over 6% for more than 18 months, or since the first week in September 2022, a situation that has weighed on mortgage applications for home purchases. During the week ended April 12, the mortgage applications index measured 145.6 and the association reported a 40% decline in loan demand from its five-year pre-pandemic average of 240.

It was no surprise, then, to see existing home sales take a tumble. In March, existing home sales fell by 4.3% from February, according to the National Association of Realtors, the largest monthly decline since November 2022. Sales were 3.7% lower than in the same month the previous year, extending a broad slowdown in sales since early 2022. This was a disappointment after two months of robust sales to begin the year.

New home sales have fared better than existing home sales since mid-2022, as builders responded to higher home prices and strong demand by offering more units for sale. Builders often have more options to woo buyers than existing homeowners. For example, 24% of builders reported offering price discounts in March, according to the National Association of Home Builders, and 60% offered other sales incentives, such as mortgage rate buydowns. This may have helped juice sales, as new-home sales in March surged 8.8% over February.

However, those days may be behind us. According to the Census Bureau, housing starts overall fell by 14.7% in March, with single-family starts dropping by 12.4% over the month and multifamily starts down by 20.8%. Completions were 13.5% lower than the prior month and 3.9% below a year ago, suggesting a pause in new home inventory.

A historically low inventory of homes for sale over the past two years has led to substantial price increases, but that appears to be improving. In March, there were a seasonally adjusted 1.2 million existing homes for sale, according to the National Association of Realtors, the most since December 2020. Yet, this is still approximately 31% below the 2017-19 average.

Inventories of existing homes for sale could rise as the spring buying season continues, but likely more is needed to help home buyers negotiate better prices. For potential home buyers to return to the market, affordability will need to improve from levels that are currently worse than during the Great Financial Crisis. The National Association of Realtors’ affordability index measured 97.2 in February after seasonal adjustments, its latest estimate. This is slightly improved from a few months ago but remains near a 40-year low.

What We’re Watching…

Since the beginning of the year, market watchers have been laser-focused on the Federal Reserve and its intentions to lower its policy rate. With Fed Chair Jerome Powell already sounding optimistic about coming rate hikes late last year, the market had been expecting five or six rate cuts this year. But stubbornly high inflation rates in the previous three months have cooled that optimism, with expectations of rate cuts diminishing. The Fed meets again next week when we hope to gain more clarity on the Fed’s thinking. In any case, a slower path of rate cuts will hinder any revival in the housing market.