The lock-in effect that has kept U.S. housing market activity subdued probably isn’t going away this year or next year or even the year after that.
It could hang over prospective buyers and sellers of existing homes for six to eight years before finally going away, Bank of America warned in a note on Monday, locking down the market into the next decade.
“The wide gap between current mortgage rates and effective mortgage rates means most homeowners are unwilling to move unless forced,” analysts said. “Moreover we do not expect current mortgage rates to fall much even if the Fed cuts as we anticipate.”
When borrowing costs were lower during the depths of the pandemic as the Federal Reserve slashed rates to near zero, homeowners rushed to refinance, leaving U.S. households with the lowest effective mortgage rate ever on records going back to 1977, according to BofA. It has ticked up about half a percentage point from its trough, but the effective rate was still at a low 3.8% in the first quarter.
As the Fed began hiking rates in 2022 to fight inflation, current mortgage rates went higher as well. Now there’s a big gap in rates.
Earlier this month, a Realtor.com report said more than half of outstanding mortgages have an effective rate of 4% or lower, and more than three-quarters have a rate of 5% or lower. Meanwhile, the current 30-year fixed rate is still hovering around 7%.
With homeowners unwilling to give up their low effective rates, the supply of existing homes has been tight and this year’s spring selling season has been muted.
Sales of existing homes hit a seasonally adjusted annual rate of 4.14 million in April of this year, barely budging in almost 18 months, BofA noted.
The bank sees that pace staying relatively flat in the coming years, projecting sales of 4.1 million for all of 2024, 4 million in 2025, and 4.2 million in 2026.
“The US housing market is stuck, and we are not convinced it will become unstuck anytime soon,” analysts wrote. “After a surge in housing activity during the pandemic, it has since retreated and stabilized.”
With supply still constrained and demand still elevated from the pandemic-induced shock, BofA expects home prices to jump 4.5% in 2024 and 5% in 2025, before finally cooling off with a 0.5% uptick in 2026. But prices could surge another 5% in 2026 if pandemic-related factors persist, analysts warned.
And don’t expect much help from newly constructed homes. The bank sees housing starts averaging a stable 1.4 million units in 2024, 2025, and 2026, with sales of new homes averaging 650,000 those years.
But others in the real estate sector think even a modest decline in mortgage rates could unlock a burst of housing market activity.
Earlier this month, Compass cofounder and CEO Robert Reffkin told CNBC that he would “feel good” about a 6.5% rate, “but the magic number is 5.9999.”
“That’d be marketing magic, and would tell the world that mortgage rates are at a level where they should go and grab a property,” he said.
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Homebuilder-stock analysts are increasingly worried about signs of softening in key hot spots like Florida and Texas.
Lennar and D.R. Horton were downgraded by Citigroup analyst Anthony Pettinari on concerns the housing market could stay “sluggish” in the second half of the year. Raymond James Financial’s Buck Horne also cut his recommendation on Lennar to market perform from outperform, particularly pointing to the company’s “outsized exposure” to Florida.
“We see softness in data – permits, starts, sales and prices all recently below expectations – potentially continuing” in the second-half of the year, Pettinari wrote in a Tuesday note to clients. “New and existing home inventories are ticking up and the ‘twin engines’ of the hot U.S. housing market – Texas and Florida – are seeing some areas of softening.”
Shares of Lennar and D.R. Horton each fell as much as 2.9% at the market open on Tuesday in New York.
Homebuilder shares soared in 2023, but had a more measured start to 2024. The S&P Composite 1500 Homebuilding Index was nearly flat through the first six months of the year, while Lennar and D.R. Horton’s shares slipped after notching record highs.
Pettinari downgraded the pair of stocks because he sees long-term positives for both builders as being balanced by the signs of worsening housing fundamentals. The analyst says that single-family housing inventories have climbed quickly in the spring and are back around pre-Covid levels.
The pair of downgrades pushed consensus recommendations on Lennar shares to the lowest level since 2017, according to data compiled by Bloomberg.
Raymond James’ Horne is more specifically concerned about the outlook for the Sunshine State and its impact on Lennar. He said the “surging re-sale inventory, now warrants an added layer of near-term caution” particularly for the company, given its dominant share of the state’s market.
Last month, Lennar’s earnings included a third-quarter forecast for home orders that was below consensus expectations. On the company’s conference call, management said they saw “continued strength” in most Florida markets.
“We still remain constructive on our broader homebuilding coverage and steadfast in our conviction that the sector is long overdue for a material valuation re-rating,” Horne wrote in a note.
Inflation and high interest rates are having a big impact on many of us, including American homeowners. Many have put their plans to buy a new home on hold. Rob Cook, Vice President of Discover Home Loans, joins us to share insights from a recent Discover survey of U.S. homeowners, top trends in the U.S. housing market, and home loan financing options to navigate economic uncertainty.
It’s been a tough year so far for homebuyers, who are facing the double whammy of high housing prices and rising loan rates. Unfortunately, the remainder of 2024 may not offer much relief, at least according to economists at mortgage buyer Freddie Mac.
“[W]e expect mortgage rates to remain elevated through most of 2024,” Freddie Mac said in a Thursday housing outlook report. “These high interest rates will prompt prospective buyers to readjust their housing expectations, but we anticipate housing demand to remain high due to favorable demographics, particularly in the starter home segment.”
Rates on a 30-year fixed mortgage are hovering above 7%, close to their highest point in more than 20 years. With inflation remaining stubbornly high, the Federal Reserve is expected to delay cutting its benchmark rate, and Freddie Mac said it’s predicting that the central bank will only make one cut in 2024 — with that occurring toward the end of the year.
according to Redfin.
The cost of homeownership has grown so steep that it now takes a six-figure income to afford the typical home in the U.S., according to Zillow. For the first time in roughly two years, home prices did not fall in any of the nation’s largest metro areas in April, Redfin said in a separate report.
Hidden costs of owning a home are rising
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Higher mortgage rates have also had an impact on some current homeowners. Because many bought or refinanced their properties in the first years of the pandemic — when rates dropped below 3% — some are wary of selling their properties if it means taking on a new mortgage at today’s rates.
Hesitant sellers combined with new construction failing to keep up with housing demand has created national shortage in both existing and new homes for sale, economists have said.
“Overall, tight inventory and higher for longer (mortgage) rates are still key barriers to home sale volumes,” Freddie Mac said. “Mortgage rates above 7% continue to price out many prospective homebuyers and sellers have less incentive to sell.”
Khristopher J. Brooks
Khristopher J. Brooks is a reporter for CBS MoneyWatch. He previously worked as a reporter for the Omaha World-Herald, Newsday and the Florida Times-Union. His reporting primarily focuses on the U.S. housing market, the business of sports and bankruptcy.
Felix Aidala, Andrew Haughwout, Ben Hyman, Jason Somerville, and Wilbert van der Klaauw
The U.S. housing market has had a tumultuous few years. After falling to record lows during the pandemic, the average 30-year mortgage rate rapidly increased in 2022 and 2023 and now hovers near a two-decade high of 7.2 percent. For those that locked in a low mortgage rate prior to 2022, this steep increase has significantly increased the cost of moving, as taking out a mortgage at current rates would potentially increase their monthly housing payment by hundreds or thousands of dollars, even if the amount they borrowed remained unchanged. As shown by Ferreira et al. (2011), this lock-in effect has the potential to reduce geographic mobility and turnover in the housing market and has gained the attention of Federal Reserve leaders. In this post, we utilize special questions from the Federal Reserve Bank of New York’s 2023 and 2024 SCE Housing Surveys to estimate the extent to which mortgage rate lock-in is suppressing U.S. household’s moving plans.
U.S. Homeowners Plan to Stay Put
In considering how mortgage rate lock-in is affecting mobility, it is also worth noting that moving rates are currently quite low in the United States. While declining mobility intensified slightly in recent years, Koşar et al. (2022) show that it is not just a pandemic-era phenomenon. For example, moving rates have been steadily declining for decades and were already below 10 percent in 2019, whereas they were close to 20 percent in the mid-1980s. Frost (2023) shows that switching residences is even rarer for homeowners, whose moving rates have been bound between 5 percent and 10 percent each year since 2006. With such low moving base rates, it is unclear if we should expect mortgage rate lock-in to significantly reduce geographic mobility.
To assess the impact of mortgage rate lock-in on homeowner’s moving plans, we first asked respondents who currently own a home for the percent chance that they will move in the next three years. As shown in the histograms below, U.S. households’ moving plans generally reflect the decline in mobility that we’ve seen in recent decades. Across the distribution of homeowners’ current self-reported mortgage rates, close to half of respondents assess their probability of moving in the next three years to be less than 10 percent, with almost three-quarters of respondents placing their chances at less than 25 percent.
These patterns are broadly consistent across homeowners with and without a mortgage, as all groups report a mean probability of moving in the next three years between 16 percent and 19 percent. Although these comparisons do not take differences of other characteristics between the groups into account, they are suggestive that few U.S. homeowners are planning to move in the next three years and are comparable to the actual rates of annual mobility we reported above.
Distribution of Self-Assessed Probability of Moving in Next Three Years by Current Mortgage Rate
Source: 2023 and 2024 SCE Housing Surveys. Note: Figures do not include renters.
Estimating the Lock-In Effect
To understand the extent to which the lock-in effect is suppressing household’s moving plans, we presented homeowners with a mortgage with a hypothetical scenario in which they are offered the option to keep their current mortgage rate if they were to move and buy another home. We then asked them for the chance that they would move in the next three years under this scenario.
As shown in the chart below, the ability to keep one’s current interest rate has a significant effect on respondents’ moving plans, as mortgage holders revise their probability of moving upward by 7.4 percentage points on average. This effect is particularly large for those with relatively low mortgage rates, as individuals with rates below 3 percent revise their average probability of moving up from 17.2 percent to 27.7 percent, and those with rates between 3 percent and 4 percent report an increase from 18.6 percent to 26 percent. These differences are both statistically significant and represent 61 percent and 39.8 percent increases respectively.
As one might expect, these revisions decrease monotonically with a respondent’s current mortgage rate, and those with mortgage rates already above 4 percent do not see a statistically significant increase. That said, it is important to note that this result is largely driven by about a quarter of homeowners. In fact, close to half of respondents do not revise their moving probability at all, and about 73.4 percent revise their probability by 10 percentage points or less. We interpret this to mean that mortgage rates are not a primary factor in most respondents’ relocation plans for the next three years but are a large constraint for a relatively small but significant share of homeowners.
Average Probability of Moving in Next Three Years by Current Mortgage Rate
Source: 2023 and 2024 SCE Housing Surveys. Note: Black bars indicate 95 percent confidence intervals.
Perhaps a more intuitive way to interpret our results is through the lens of a respondent’s perceived mortgage rate gap, which we define as the difference between their perception of the rate they would receive on a new mortgage today, and their current mortgage rate. The chart below shows that the distribution of perceived rate gaps is largely positive, as respondents generally expect that they would need to take out a higher mortgage than they currently have if they were to move. About 9 percent report negative perceived rate gaps, indicating that they believe they could obtain a better rate than they have now. This could indicate that their personal circumstances have changed since they obtained their mortgage. For example, some of these individuals may have recently seen increases in their credit scores.
Distribution of Mortgage Borrowers’ Perceived Mortgage Rate Gaps
Source: 2023 and 2024 SCE Housing Surveys. Note: A respondent’s perceived mortgage rate gap is defined as the difference between their perception of the rate they would receive on a new mortgage today and their current mortgage rate.
To put our results in terms of respondents’ perceived rate gaps, consider that at baseline, they report an average probability of moving in the next three years of 17.5 percent, and an average perceived mortgage rate gap of 2.1 percentage points. In our hypothetical scenario, we set their perceived gap to zero percentage points and see their average probability of moving rise to 24.9 percent. If we consider these effects linearly, this implies that a one percentage point decrease in an individual’s perceived mortgage rate gap is on average associated with about a 3.5 percentage point increase in their self-assessed likelihood of moving in the next three years.
Will Reducing Mortgage Rates Increase Mobility?
Private forecasters anticipate that the federal funds rate will decline at some point in the future, with mortgage rates generally expected to follow suit. Our results suggest that these reductions would spur some increase in relocations. That said, most homeowners in our survey do not seem to be making their moving plans based on mortgage rates. For those who are, the effect of rate cuts on their mobility will ultimately depend on their beliefs about the rate they would qualify for on a new home. Indeed, understanding how households form perceptions of the housing market will be an exciting area of research going forward, and important to understanding the extent to which the lock-in effect reduces mobility.
Chart data
Felix Aidala is a research analyst in the Federal Reserve Bank of New York’s Research and Statistics Group.
Andrew F. Haughwout is the director of Household and Public Policy Research in the Federal Reserve Bank of New York’s Research and Statistics Group.
Ben Hyman is a research economist in Urban and Regional Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.
Jason Somerville is a research economist in Consumer Behavior Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.
Wilbert van der Klaauw is the economic research advisor for Household and Public Policy Research in the Federal Reserve Bank of New York’s Research and Statistics Group.
How to cite this post: Felix Aidala, Andrew Haughwout, Ben Hyman, Jason Somerville, and Wilbert van der Klaauw, “Mortgage Rate Lock‑In and Homeowners’ Moving Plans,” Federal Reserve Bank of New York Liberty Street Economics, May 6, 2024, https://libertystreeteconomics.newyorkfed.org/2024/05/mortgage-rate-lock-in-and-homeowners-moving-plans/.
Disclaimer The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).
LOS ANGELES — The average rate on a 30-year mortgage moved back above 7% this week, a setback for home shoppers at a time when the U.S. housing market is already slowing under the strain of elevated home loan borrowing costs and rising prices.
The rate rose to 7.03% from 6.94% last week, mortgage buyer Freddie Mac said Thursday. A year ago, the rate averaged 6.79%.
This is the first increase after a three-week pullback. Higher mortgage rates can add hundreds of dollars a month in costs for borrowers, limiting homebuyers’ purchasing options.
Borrowing costs on 15-year fixed-rate mortgages, popular with homeowners refinancing their home loans, also rose this week, pushing up the average rate to 6.36% from 6.24% last week. A year ago, it averaged 6.18%, Freddie Mac said.
Mortgage rates are influenced by several factors, including how the bond market reacts to the Federal Reserve’s interest rate policy and the moves in the 10-year Treasury yield, which lenders use as a guide to pricing home loans.
Yields climbed earlier this week on worries about tepid demand for Treasury bonds following several U.S. government auctions and a surprising report showing confidence among U.S. consumers is strengthening. Economists had been expecting it to show a drop in confidence.
The Fed has been holding the federal funds rate at the highest level in more than two decades in hopes of grinding down on the economy enough to get high inflation fully under control. The central bank has maintained it doesn’t plan to cut interest rates until it has greater confidence that price increases are slowing sustainably to its 2% target.
“This reality, as well as economic signals that have moved sideways over the last few weeks, have resulted in mortgage rates drifting higher as markets continue to dial back expectations of interest rate cuts,” said Sam Khater, Freddie Mac’s chief economist.
After climbing to a 23-year high of 7.79% in October, the average rate on a 30-year mortgage stayed below 7% this year until April. Even with the declines earlier this month, the rate remains well above where it was just two years ago at 5.09%.
The overall uptick in rates have been an unwelcome development for home shoppers in the midst of the spring homebuying season, traditionally the busiest time of the year for home sales. On average, more than one-third of all homes sold in a given year are purchased between March and June.
Sales of previously occupied U.S. homes fell in March and April as home shoppers contended with rising mortgage rates and prices. Sales of new homes also slowed in April, falling 7.7% from a year earlier, as borrowing costs slowed.
New data on contract signings for U.S. homes, a bellwether for future home sales, point to potentially further slowing of home sales.
The National Association of Realtor’s pending home sales index fell 7.7% in April from the previous month, the trade group said Thursday. April’s drop in pending home sales is the first since January.
“The impact of escalating interest rates throughout April dampened homebuying, even with more inventory in the market,” said Lawrence Yun, the NAR’s chief economist. “But the Federal Reserve’s anticipated rate cut later this year should lead to better conditions, with improved affordability and more supply.”
A lag of a month or two usually exists between when a contract is signed and when the home sale is finalized. That suggests a possible pullback in sales of previously occupied U.S. homes for May.
As rates have ticked higher, so have the monthly payments home shoppers need to take on when applying for a mortgage.
The national median monthly payment listed on home loan applications was $2,256 in April, a 2.5% increase from the previous month and 6.8% higher than what it was a year earlier, according to the Mortgage Bankers Association.
Should we elaborate further? Mortgage rates are now topping 7.5%, the highest levels seen this year. You’d think the sales rate would be slowing, but there aren’t signs of it. It’s possible that sales will slow, but maybe it takes a few more weeks to manifest than expected.
At Altos Research, where we track every home for sale in the country each week, the data so often defies expectations or changes very quickly. By tracking the pricing, supply and demand, sales and changes in the data, you can immediately understand it as it happens. Let’s look at the details of the U.S. housing market at the end of April 2024.
Housing inventory
There are now 556,000 single-family homes on the market. That’s up 2.4% from last week, with slightly more than 13,000 additional properties on the market now than a week ago.
Unsold inventory now is almost 32% higher than at this time last year — and it’s 90% higher compared to the end of April 2022. Two years ago, inventory was jumping along with mortgage rates. But that’s not what’s occurring now as the increases are more steady.
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This is one way to illustrate that consumers are more sensitive to changes in rates than to the actual levels. Rates are higher now, so unsold inventory is higher. But two years ago, rates were climbing by 20 basis points or so each week for much of the spring. Rates were climbing rapidly and so was inventory. Now the increase in both of these lines is slower.
In 2022, there were record-low numbers of unsold homes on the market, but the numbers were climbing rapidly, with 18,000 to 20,000 properties added each week. Today, we’re adding 13,000 per week. While interest rates and inventory are rising in 2024, they were doing so much more quickly two years ago. The change in rates is what drives change in behavior.
New listings
There were 72,000 new single-family listings unsold this week, Another 21,000 homes were newly listed and already under contract (what are known as immediate sales) for a total of 93,000 new sellers this week. That’s much more than at any point of 2023. You have to go back to July 2022 to find this much seller activity in a given week.
So, why is the seller volume increasing, where is it coming from and is it time to panic?
First, keep in mind that immediate sales are still at a reasonably healthy level. Plenty of homes are receiving offers and going into contract immediately upon being listed — 21,000 this week, or 22.5% of the market.
Next, keep in mind that there are still 20% fewer sellers each week than there would have been in a “normal” year prior to the COVID-19 pandemic. There are not a lot of sellers. It’s just that in the past decade as mortgage rates fell, more real estate began to be hoarded and fewer sales took place. In the accompanying video, you can see the relative levels of new weekly listings. Seller volume is still running pretty low because homeowners have such a good deal with their low mortgage rates that they don’t want to sell.
Fixed mortgage rates mean fixed costs for most homeowners. Fixed costs theoretically means they won’t ever have to sell. But in areas where costs are rising — due to higher property taxes, insurance hikes or other rising maintenance expenses — homes are more likely to hit the resale market.
Right now, this is most obvious in Texas and Florida. Over the past year, 40% of the inventory increase at the national level has come from these two states. Texas and Florida combine for 29% of the country’s active listings and 16% of its population, so outsized gains are happening in these place. For example, if you have a second home in southwest Florida that you only use occasionally and your insurance costs tripled this year, it’s very tempting to sell. And some people are doing so.
The opposite trend is happening in New York, which has the fewest available homes per capita right now. That dubious distinction is usually reserved for California. New York has slightly fewer homes on the market than at this time last year, whereas Florida now has 59% more.
The takeaway here is that inventory gains are happening pretty much everywhere but at a significantly higher rate in the Sun Belt states — from Florida to Texas and Arizona.
Pending sales
There are 398,000 single-family homes under contract now — a few percentage points more on a year-over-year basis. These homes in the pending-sales stage will mostly close in May.
This is slight seller growth but not a pullback, even with April’s mortgage rate increases.
Frankly, this pace could’ve been expected to reverse, but it hasn’t happened yet. In 2022, sales dwindled in the second half of the year and have yet to recover. The video above illustrates how quickly home sales slowed as mortgage rates rose — especially in June and September 2022.
This year, the trajectory is staying surprisingly positive. As the average rate jumped from 7% to 7.5%, that slowdown could’ve been expected to happen again. If the market gets lucky and rates don’t climb past 8%, then the sales rate might continue to slowly recover by later this summer. But rates could keep climbing. The macroeconomic data keeps coming in strong and we’ll just have to watch to see what happens.
There were 76,000 new contracts started this week for single-family homes in the U.S. That’s more than in any week for all of 2023. It’s strong growth — 9% more than the same week a year ago. Sales volume typically peaks at the end of June, so we likely have more growth to come in the spring market. And the weekly new pending sales count is already ahead of the best weeks posted last year.
Home prices
The median price of homes under contract is now slightly more than $399,900, good for 5% year-over-year growth. What’s being tracked here is the final asking price for the homes that went into contract. This is the earliest proxy for the final sales price. Any given home may sell for more or less than asking price, but in aggregate, the actual sales price is very close to this pending sales price.
Altos Data watches several measurements of home prices. There’s asking prices, or what you’ll see if you’re shopping the market today. The median price of all homes on the market right now is just under $445,000 and is only 1% higher than in April 2023.
The price for a new listing is the best leading indicator, and there are the prices of the set that is being purchased, which is what we’re looking at here. These are all useful indicators of home prices.
Historic data shows, for example, precisely when home prices fell in June and September 2022. At that time, there were large jumps in seller inventory coupled with sudden, additional spikes in mortgage rates. So, homebuyers adjusted their expectations and prices dropped. We’re on the alert for these price declines today but have yet to see them.
Price reductions
While watching for leading indicators for changes in sales prices, we saw a meaningful uptick in price reductions. This week, 32.5% of the homes on the market included a price cut. That’s up 50 basis points from last week and is 340 bps more than at the end of April 2023.
This week last year was the final decline of the spring season. Pricing was much firmer last year, but the share of homes with price cuts in 2024 have increased for 10 weeks. It’s a much slower season compared to last year and spring is when the most upward pressure on home prices typically happens.
But price cuts are on the rise. The curve this year is following a very clear seasonal trend. Home prices are not crashing and there’s no signal anywhere in the data that a crash is imminent. But there are more homes with price cuts now than in April of any recent year, so that’s a pretty weak signal.
In the price reductions chart of the accompanying video, notice how this year’s curve is elevated above that of any recent year. There are more homes on the market with price cuts today than in any April in more than a decade — even though this rate is not climbing nearly as quickly as it did two years ago when the market changed.
If you look at the local data, you’ll see that the Florida markets are dominating in terms of price cuts. More than 50% of the homes on the market in most of the major Florida metro areas have had price cuts. Inventory is up and prices are lower on an annualized basis. Nationally, however, the data is balanced out by many markets, such as those in the Northeast, where inventory is still very low.
If mortgage rates keep climbing, we could more than 40% of U.S. listings with price cuts by the latter portion of summer. That would likely be a negative indicator for future sales prices — i.e., home price declines. As mentioned earlier, home prices today are higher than they were a year ago (by 1% to 5%, depending on which measurement is used). But the price-reductions trend seems like it is poised to slow down. It looks as if home prices in 2024 will remain flat, at best, although 2023 offered a surprise and that could happen again as this year unfolds.
LOS ANGELES (AP) — Prospective homebuyers are facing higher costs to finance a home with the average long-term U.S. mortgage rate moving above 7% this week to its highest level in nearly five months.
The average rate on a 30-year mortgage rose to 7.1% from 6.88% last week, mortgage buyer Freddie Mac said Thursday. A year ago, the rate averaged 6.39%.
When mortgage rates rise, they can add hundreds of dollars a month in costs for borrowers, limiting how much they can afford at a time when the U.S. housing market remains constrained by relatively few homes for sale and rising home prices.
“As rates trend higher, potential homebuyers are deciding whether to buy before rates rise even more or hold off in hopes of decreases later in the year,” said Sam Khater, Freddie Mac’s chief economist. “Last week, purchase applications rose modestly, but it remains unclear how many homebuyers can withstand increasing rates in the future.”
AP business correspondent Alex Veiga reports mortgage rates reaching their highest level in months.
After climbing to a 23-year high of 7.79% in October, the average rate on a 30-year mortgage had remained below 7% since early December amid expectations that inflation would ease enough this year for the Federal Reserve to begin cutting its short-term interest rate.
Mortgage rates are influenced by several factors, including how the bond market reacts to the Fed’s interest rate policy and the moves in the 10-year Treasury yield, which lenders use as a guide to pricing home loans.
But home loan rates have been mostly drifting higher in recent weeks as stronger-than-expected reports on employment and inflation have stoked doubts over how soon the Fed might decide to start lowering its benchmark interest rate. The uncertainty has pushed up bond yields.
The yield on the 10-year Treasury jumped to around 4.66% on Tuesday — its highest level since early November — after top officials at the Federal Reserve suggested the central bank may hold its main interest steady for a while. The Fed wants to get more confidence that inflation is sustainably heading toward its target of 2%.
The yield was at 4.64% at midday Thursday after new data on applications for unemployment benefits and a report showing manufacturing growth in the mid-Atlantic region pointed to a stronger-than-expected U.S. economy.
“With no cuts to the federal funds rate imminent and with the economy still strong, there is no reason to see downward pressure on mortgage rates right now,” said Lisa Sturtevant, chief economist at Bright MLS. “It seems increasingly likely that mortgage rates are not going to come down any time soon.”
Sturtevant said it’s likely the average rate on a 30-year mortgage will hold close to 7% throughout the spring before easing to the mid-to-high 6% range into the summer.
Other economists also expect that mortgage rates will ease moderately later this year, with forecasts generally calling for the average rate to remain above 6%.
Mortgage rates have now risen three weeks in a row, a setback for home shoppers this spring homebuying season, traditionally the housing market’s busiest time of the year.
Sales of previously occupied U.S. homes fell last month as home shoppers contended with elevated mortgage rates and rising prices.
While easing mortgage rates helped push home sales higher in January and February, the average rate on a 30-year mortgage remains well above 5.1%, where was just two years ago.
That large gap between rates now and then has helped limit the number of previously occupied homes on the market because many homeowners who bought or refinanced more than two years ago are reluctant to sell and give up their fixed-rate mortgages below 3% or 4%.
Meanwhile, the cost of refinancing a home loan also got pricier this week. Borrowing costs on 15-year fixed-rate mortgages, often used to refinance longer-term mortgages, rose this week, pushing the average rate to 6.39% from 6.16% last week. A year ago it averaged 5.76%, Freddie Mac said.
Frankly, however, the biggest surprise at the moment might be that sales volumes have held up pretty well over the past few weeks even as mortgage rates have climbed into the mid-7s. We’ve been talking about sales growth over the past year. More home sales are happening, but we can also see — once adjusted for seasonal patterns — that sales should be much higher now if a real market recovery were underway.
It feels like the latest macro trends will keep mortgage rates in the mid-7% range for the near term. And we’d expect that to slow home sales further. That’s why Altos Research tracks every home for sale in the country each week. The data so often defies expectations or changes very quickly. Let’s dig further into the details of the U.S. housing market for the week of April 22.
Housing inventory
When we look at the active inventory of unsold homes on the market, we can definitely see the impact of higher mortgage rates in the past month. There are 543,000 single-family homes on the market now. That’s a 3% jump from last week and 31% above year-ago levels.
The available inventory of unsold homes on the market is building quickly due to the most recent mortgage rate jumps. There are 130,000 more homes on the market now than last year at this time.
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Normally, inventory is climbing at this point in the second quarter. We’re rapidly approaching the peak of the market in terms of seller listings, and as inventory builds, the sales rate will peak by the end of June. So, it’s normal that inventory is growing now.
But when you add a spike in mortgage rates that makes homebuying less affordable, that leads to fewer buyers and inventory grows. Altos data currently shows an inflection point in April. With the most recent mortgage rate jump, inventory growth has also accelerated.
This is what is meant when we say that higher rates leads to higher inventory. We are on the path back to the formerly normal levels of unsold homes on the market. A couple more years with elevated rates will get us there.
But it’s also noteworthy to point out that falling rates reverse this trend. Lower rates mean that people snap up the existing inventory.
New listings
Growing inventory is not just about slowing demand. We are also consistently measuring more sellers coming back into the market. At 69,000 new listings unsold today, that’s 3% more than a week ago and 14% more than this time last year.
In fact, there are more new sellers this week than in any week of 2023. This selling season still has two more months of growth potential. Industry professionals would love to see 70,000 or 80,000 new listings per week in May. More sellers means more sales can happen. There’s a limit, of course, as we could eventually reach an imbalance if too many sellers flood the market and too few buyers follow suit. But we’re not close to that yet.
In the years before the COVID-19 pandemic, the latter half of April would normally see 80,000 to 100,000 new listings in a week. Now we’re at 69,000. Obviously, elevated mortgage rates slows both buyer and seller activity. There are a lot of people who will never sell their house with a 3% mortgage.
There’s unlikely to be a flood of sellers in the next few years, but we can see steady growth. Each year with higher rates will create more inventory growth and have fewer people locked into low rates. That growth is good for the market.
The available inventory of homes to buy and the new ones being listed for sale each week are what consumers care about. If I’m buying a house, do I have any houses to buy? For homebuyers, the selection they have now is the most they’ve had in years.
Real estate professionals, on the other hand, have to care about transaction volume. How many home sales are happening? Because there were so few sellers last year, the number of sales was quite constricted. That’s starting to change. The 14% increase in new listings over the past year is a really good sign that sales can grow.
Pending sales
When we look at the sales rate, we can indeed see that home sales are growing. There were 71,000 new contracts started for single-family homes this week. That’s 3% more than last week and 7% more than a year ago.
There are still 8% fewer sales happening each week than in 2022. At that time two years ago, there were frantic last-minute deals getting done as mortgage rates were rising quickly. So, even though rates were up back then, sales were still strong.
But the hectic pandemic-era pace of sales had slowed, so inventory was building quickly. In 2022, the new sales rates really cratered after the Fourth of July holiday.
There are now 385,000 single-family homes under contract. That’s 5% growth compared to this time last year but is still 14% less than two years ago. New sales started this week saw 7% growth while the total number of homes under contract saw 5% growth.
It takes 30 to 40 days for the typical sale to close. The homes under contract now will mostly close in April and May. The 5% annualized growth rate is less than we’d hoped for at the start of the year, but it’s creeping up even with higher mortgage rates.
Altos Research uses direct measurement rather than seasonally adjusting its numbers. There are 385,000 single-family homes in escrow to complete a sale as of today. If you were to approximate a seasonal adjustment on this number, you would see a yearly sales pace of about 4.4 million units for April 2024. That pace is up from April 2023, but it is still running slower than the typical April. The seasonal pace is where one can observe the slowdown due higher mortgage rates.
The takeaway from the weekly new pending sales data is that even though sales continue to outpace last year, that growth has definitely slowed.
Home prices
The median price of single-family homes under contract is now $398,000. That jumped by 2.4% jump this week and is, in fact, a new all-time-high, surpassing the sale prices of two years ago.
These spring weeks are indeed the time when home prices climb, so it’s not too surprising that this trend is occurring now. But we’ve also been keeping a close eye on home prices in the face of these rising mortgage rates.
The prices of the homes going under contract are 6% more expensive than one year ago. Last year at this time, home prices were lower than in April 2022. But we’re now back at all-time highs. The previous peak was $395,000 two years ago.
One thing of interest in the price data is how slow this climb has been. Compared to Jan. 1, 2024, prices are up 6.6%. In most years, the increase is closer to 10% by this time in April. So, as a leading indicator for how the year ends up, this price signal is much softer than usual.
We can also see this in asking prices. The median price for all homes currently on the market is $449,000. That’s up a fraction from last week and only 1% above last year at this time.
Asking prices can be thought of as a leading indicator for future sales prices. Homes that are on the market now will get offers in May, close in June and will be reported on in July. So, the future signals for home prices aren’t falling because of higher mortgage rates, but it certainly looks like price appreciation has slowed.
Price reductions
Another strong leading indicator for future home sale prices is the share of homes on the market with price reductions. If more sellers have to cut their prices now, that’s a real signal for sales that will happen in the future.
Surprisingly, given the mortgage rate changes, there is no jump yet in the share of price reductions. We’ve been watching this stat closely.
This week, 32% of the homes on the market have taken a price cut. That’s actually down a fraction from last week, given a relatively strong set of new listings that hit the market and the fact that home sales are at their highest point of the year. Fresh inventory doesn’t take a price cut until after it sits for a while without an offer.
There are 3% more homes with price reductions today than a year ago. Last year at this time, price cuts were still decreasing with very tight volumes of new listings. There are more homes on the market now with price cuts than in any April on record. That shows weakness in prices, but it’s not a super high number and it’s not skyrocketing, so that implies we won’t see prices tanking anytime soon.
The takeaway here is that with the 30-year fixed mortgage at 7.4%, there is still just enough sales volume to keep home prices from dropping like they did in late 2022. The current market is not changing nearly that quickly. We’ll continue to watch data on price cuts. As mortgage rates make homes less affordable, fewer offers will be made and some sellers will cut their prices. That could accelerate in the next few weeks.
LOS ANGELES (AP) — The spring homebuying season is off to a sluggish start as home shoppers contend with elevated mortgage rates and rising prices.
Sales of previously occupied U.S. homes fell 4.3% in March from the previous month to a seasonally adjusted annual rate of 4.19 million, the National Association of Realtors said Thursday. That’s the first monthly decline in sales since December and follows a nearly 10% monthly sales jump in February.
Existing home sales also fell 3.7% compared with March last year. The latest sales still came in slightly higher than the 4.16 million pace economists were expecting, according to FactSet.
A modest pullback in mortgage rates early this year helped lift home sales in January and February, but rates mostly ticked up in February and March, when many of the home sales that were finalized last month would have taken place.
AP correspondent Shelley Adler reports on the spring homebuying season.
Mortgage rates have risen the past three weeks, with the average rate on a 30-year mortgage moving this week above 7% to its highest level since late November, mortgage buyer Freddie Mac said Thursday.
The trend is a setback for home shoppers this spring homebuying season, traditionally the housing market’s busiest time of the year.
“Home sales essentially remain stuck because (the) mortgage rate has been stable and inventory is not really rising,” said Lawrence Yun, the NAR’s chief economist.
Despite the pullback in sales, the national median home sales price climbed 4.8% from a year earlier to $393,500. That’s the highest median sales price for any March on records going back to 1999 and marks the ninth month in a row that prices have risen compared to a year earlier.
The latest surge in prices reflects the heightened competition many home shoppers are facing. Consider, 60% of homes purchased in March sold within less than a month of hitting the market. And 29% of homes sold above their initial list price, up from 28% in March last year, Yun said.
“Inventory is simply not there,” he said.
While the supply of homes on the market remains below the historical average, the typical increase in homes for sale that happens ahead of the spring homebuying season gave home shoppers a wider selection of properties to choose from.
At the end of last month, there were 1.11 million unsold homes on the market, a 4.7% increase from February and up 14.4% from a year earlier, the NAR said. That’s still well short of the 1.7 million homes on the market in March 2019, before the pandemic.
The available inventory at the end of last month amounted to a 3.2-month supply, going by the current sales pace. That’s up from a 2.9-month supply in February and a 2.7-month supply in March last year. In a more balanced market between buyers and sellers, there is a 4- to 5-month supply.
That shortage of homes on the market means home sellers generally having an edge on buyers, especially those vying for the most affordable homes, which often fetch multiple offers.
The U.S. housing market is coming off a deep, 2-year sales slump triggered by a sharp rise in mortgage rates and a dearth of homes on the market. Sales of previously occupied U.S. homes sank to a nearly 30-year low last year, tumbling 18.7% from 2022 as the average rate on a 30-year mortgage surged to a 23-year high of 7.79%, according to Freddie Mac.
The average rate on a 30-year mortgage got as low as 6.67% in mid January, but has been creeping higher, reaching 7.1% this week. When mortgage rates rise, they can add hundreds of dollars a month in costs for borrowers, limiting how much they can afford.
Mortgage rates have mostly drifted higher in recent weeks as stronger-than-expected reports on employment and inflation stoked doubt among bond investors over how soon the Federal Reserve will move to lower its benchmark interest rate.
Home loan borrowing rates are influenced by several factors, including how the bond market reacts to the Fed’s interest rate policy and the moves in the 10-year Treasury yield, which lenders use as a guide to pricing home loans.
The yield on the 10-year Treasury jumped to around 4.66% on Tuesday — its highest level since early November — after top officials at the Federal Reserve suggested the central bank may hold its main interest steady for a while. The central bank wants to get more confidence that inflation is sustainably heading toward its target of 2%.
Many economists still expect that mortgage rates will ease modestly this year, which could give homebuyers who can’t afford to pay all cash for a home more purchasing power.
“The 30-year-fixed mortgage rate could rise for few months to maybe even 7.5% before settling back down to 6.5% by the end of the year,” Yun said. In January, NAR forecast the average rate would drop to 6.1% by year’s end.
Economists at Realtor.com also project that the rate could average 6.5% by the end of this year.
For now, first-time homebuyers who don’t have any home equity to put toward their down payment continue to have a tough time getting into the housing market, though they accounted for 32% of all homes sold last month, an increase from 26% in February and 28% in March last year. That’s still well short of the 40% of sales they’ve accounted for historically.
Prospective homebuyers are facing competition from buyers who can afford to buy a home in cash. Some 28% of homes sold last month were purchased entirely with cash, down from 33% in February, but up from 27% a year ago, the NAR said.