Has the decrease in mortgage rates had a positive impact on housing demand data yet? Many individuals have expressed disappointment with the data thus far, prompting a closer examination in this week’s tracker to analyze the effects of lower rates on key data trends. Let’s delve into two of these data lines today to identify any potential positive trends.
Purchase application data
My belief has always been that for the existing home sales market to experience genuine growth and sustainability, we require mortgage rates below 6% for an extended period. I highlighted this point early in the year when discussing with CNBC.
In late 2022, mortgage rates dropped below 6%, resulting in 12 weeks of positive data and a significant surge in existing home sales. However, when rates increased, sales declined. Towards the end of 2023, rates lowered but remained above 6%, leading to only eight weeks of positive growth. Once rates rose again, sales decreased. Earlier this year, I predicted that monthly home sales data had peaked unless rates decreased due to my firm belief in the rate model.
What about now with purchase apps?
Purchase applications exhibit seasonal patterns, with a focus typically placed on the period from the second week of January to the first week of May. Traditionally, volumes decline post-May. However, when rates fell in the past, we observed increased activity in purchase apps in November, similar to levels seen in the seasonal spring months. How does the current scenario compare?
Despite the recent dip in mortgage rates, the impact on purchase applications has been relatively minor. Over the last nine weeks, we have experienced five positive and four negative purchase application weeks, translating to a cumulative 14% versus 12% during negative weeks. Thus, lower rates have only slightly influenced demand at present.
Although the most recent pending home sales data exceeded expectations due to positive trends in the initial weeks of June, no significant developments have occurred. While the situation is an improvement from earlier in the year when rates approached 7.5%, it does not signify a substantial change.
Weekly housing inventory data
The standout aspect for housing in 2024 has been the growth in housing inventory. We have moved away from the critically low levels of 2022, with only 240,000 homes available for sale in March of that year. According to my model, higher rates that fail to stimulate mortgage demand can lead to increased inventory levels.
Consistently, when rates remain high, particularly over 7.25%, inventory growth ranges between 11,000 and 17,000 per week. This pattern has occurred six times this year, aligning perfectly with the model. While we have not exceeded 17,000 in weekly inventory growth yet this year, the recent decrease in rates prompts a closer analysis of the last three weeks.
Over the last three weeks, inventory growth has been positive but has not reached the weekly growth target despite lower rates. This minor deviation does not undermine the overall positive trend in inventory growth for the year.
Last three weeks, inventory growth has been:
- Last week: 9,024
- Week before: 6,482
- 2 weeks ago: 8,883
We are approaching the period of inventory seasonality, and regardless of future developments in 2024, the growth in inventory remains a positive factor.
Conclusion?
While housing demand has not experienced a significant upsurge with lower rates, refinancing has shown growth. This trend was recently discussed in this podcast. For purchase application data, monitoring the trajectory for the remainder of the year, especially if rates remain below 7% and decrease further, will be crucial. As we approach the end of the seasonal housing period, sustained lower rates may lead to year-over-year growth in purchase applications, albeit against the backdrop of historically high rates. It is essential to monitor this aspect along with another critical variable: mortgage spreads.
If average spreads were in place, mortgage rates would currently be at 5.5%. A decrease in the 10-year yield could potentially result in mortgage rates dropping below 5% with average spreads. As we navigate the weeks ahead and monitor the Fed’s potential rate cuts, a keen eye on the U.S. economy’s status is imperative.
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