Has the housing demand data been positively impacted by lower mortgage rates yet? Many people have been disappointed with the data so far, prompting a closer look with this week’s tracker to analyze the effects of lower rates on key data lines. Let’s focus on two of those data lines today to identify any positive trends.
Purchase application data
I have always believed that for the existing home sales market to experience real growth and sustainability, we need mortgage rates below 6% for an extended period. I emphasized this point in an interview with CNBC earlier this year.
In late 2022, mortgage rates dropped to around 6%, resulting in 12 weeks of positive data and a significant increase in existing home sales. However, when rates increased again, sales declined. Towards the end of 2023, rates decreased but did not reach 6%, leading to only eight weeks of positive growth before rates rose once more and sales declined. I predicted earlier this year that monthly home sales data had peaked unless rates decreased.
What about now with purchase apps?
Purchase applications are usually seasonal, with peak activity occurring from the second week of January to the first week of May. Historically, volumes tend to decrease after May. However, the past instances of rate drops resulted in increased purchase app activity in November, similar to what is typically seen in the spring months. How does the current situation compare?
Despite mortgage rates dipping again, the impact on purchase applications has been minimal. In the past nine weeks, there have been five positive and four negative weeks, with a cumulative percentage of 14% versus 12% on the negative weeks. Lower rates have only marginally affected demand at this point.
While recent pending home sales data showed some improvement due to positive weeks in June, overall, there have been no significant changes compared to earlier in the year when rates approached 7.5%.
Weekly housing inventory data
The standout story for housing in 2024 has been the growth in housing inventory. We have moved away from the extremely low levels of 2022 when only 240,000 homes were available for sale in March of that year. My model indicates that higher rates, when not driving mortgage demand, can lead to increased inventory levels.
As long as rates remain high, particularly above 7.25%, inventory should grow between 11,000 and 17,000 per week. This has been consistent with my model, with inventory growth averaging between 11,000 and 17,000 per week six times this year. While we have not exceeded 17,000 in weekly inventory growth yet, the last three weeks have shown healthy growth even with lower rates.
Inventory growth in the last three weeks:
- Last week: 9,024
- Week before: 6,482
- 2 weeks ago: 8,883
We are approaching the inventory seasonality period, and regardless of the upcoming months in 2024, inventory growth remains a positive factor.
Conclusion?
While housing demand has not seen a significant boost from lower rates, there has been growth in refinancing. This was discussed in a recent podcast, highlighting modest growth in the data with lower rates.
For purchase application data, it will be crucial to monitor if mortgage rates stay below 7% and continue to decrease. As we approach the end of the seasonal housing period, lower rates could lead to year-over-year growth in purchase applications, albeit against the low bar set by last year’s 8% rates. Keeping a close watch on mortgage spreads will also be essential.
If average spreads were in place, mortgage rates would be at 5.5% currently. Further decreases in the 10-year yield could potentially bring rates below 5% with average spreads. As we await the Fed’s rate-cutting process, we are closely monitoring the state of the U.S. economy on a weekly basis.
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