When the housing market said, “Jump!” mortgage rates asked, “How high?”
Last month, mortgage rates reached a more than two-decade high, but started to dip earlier this month following the Fed’s most recent pause in interest rate hikes. It was the first sign of possible recovery in what’s been an otherwise bleak housing market.
In its Nov. 15 press release, Joel Kan, the MBA’s deputy chief economist, says that even though both purchase and refinance applications increased to the highest weekly pace in five weeks, overall demand for mortgages remains very low. “Despite the recent downward trend, mortgage rates at current levels are still challenging for many prospective homebuyers and current homeowners,” he notes.
Experts say mortgage rates won’t see any dramatic declines in the near future, though they could go down to 6% in 2024. “Fluctuations and volatility will continue as the path of inflation is still uncertain,” said Selma Hepp, chief economist at CoreLogic.
That means anxious buyers have little reason to wait, according to Matt Graham of Mortgage News Daily. “Prices won’t likely be going down. And in the likely event that rates go down, the average buyer would be better served to get the home they want when they want it and refinance later,” said Graham.
Here’s a look at what’s currently at play in today’s housing market.
Will mortgage rate declines bring buyers off the sidelines?
Recent decreases in mortgage rates have been fueled by an array of factors, including a lower 10-year Treasury yield, a weaker jobs report, progress on inflation and signs that the Federal Reserve’s aggressive rate-hike policy could be coming to an end.
While the decline in mortgage rates does help improve affordability, the impact on the housing market is likely to be small, according to Matthew Walsh, housing economist for Moody’s Analytics. “Mortgage rates remain near their highest level since 2000, and to restore housing affordability, we would need to see a much larger decline in this rate, absent a decline in home prices or an increase in wages,” said Walsh.
The low supply of homes also continues to be a major issue, Diana Sutherlin, real estate agent at Compass, told CNET last week. But as soon as rates started to tick down below 8%, there was a flurry of activity reminiscent of the bidding wars during the pandemic homebuying boom. Since home prices aren’t expected to come down in the foreseeable future, buyers don’t want to miss out on any opportunities, Sutherlin said.
How has the housing market changed in 2023?
Soaring mortgage rates, limited inventory and high housing costs have led to a significant decline in affordability. Those factors have affected virtually every aspect of housing market activity.
Homebuyers are changing
While many first-time homebuyers are priced out of their ideal neighborhoods or preferred housing style, others are just excluded from the market entirely. In 2022, first-time homebuyers accounted for a mere 26% of all homebuyers, compared with 50% in 2010. There’s also a generational shift -- today’s first-time homebuyers are likely to be older. Millennials are buying homes later in life due to a combination of obstacles: student loan debt, inflated home prices and buying competition from Wall Street investors.
While overall home-buying demand has been limited, there will always be some people buying homes. Right now they just need a strong incentive to do so, according to Matt Graham of Mortgage News Daily. Homebuyers are largely purchasing out of necessity rather than desire. Instead of settling on a new property for an aesthetic change, today’s buyers are spurred by big life changes, such as employment, income, education or family size, Graham noted.
The housing market looks different depending on where you’re located. Low inventory levels and high home prices nationwide are making it a seller’s market, but that’s not the case everywhere, said Matthew Walsh, housing economist with Moody’s Analytics.
“Prices remain below their year-ago level in some of the most overvalued parts of the country, like Austin, Texas, and Phoenix, Arizona,” Walsh said. Some metro areas that saw home prices rise the most during the pandemic were the first to experience price drops when home-buying demand slowed last year.
Though first-time homebuyers are dwindling, some regions have other buyers in the mix, such as move-up and move-down buyers, cash buyers and investors, according to Logan Mohtashami, lead analyst at HousingWire. “I think we’re seeing a return to a more balanced housing market in some places, but it may take longer to see that return to normalcy in other areas,” he said.
Sellers are also struggling
Sellers may have the upper hand in today’s market, but they aren’t immune to today’s adverse housing market conditions, says Keith Gumbinger of HSH.com.
Homeowners who purchased prior to 2022 have much lower mortgage rates than today’s rates. As a result, many are reluctant to sell their house and buy a new one with a more expensive mortgage attached. This phenomenon is known as “golden handcuffs,” leaving many homeowners feeling stuck without recourse to sell or refinance. If they were to sell, they’d face the same low housing supply and inflated prices as everyone else, Gumbinger notes.
Lack of inventory is driving competition
When mortgage rates were at record lows during the pandemic, the housing market was incredibly competitive, with prospective buyers offering well over the asking price and waiving inspections to get their offer accepted.
Today’s high mortgage rates have stifled demand, but they haven’t eliminated it. “Lack of inventory continues to drive competition among buyers, as there continues to be greater demand than available supply,” said Selma Hepp, chief economist at CoreLogic.
With fewer homeowners willing to sell their homes, experts say existing inventory won’t improve dramatically anytime soon. Mortgage rates may need to fall closer to 6%, if not below that, before there’s significant progress.
A boom in new home construction would also help, especially if builders can offer financial incentives to make housing cheaper for cash-strapped buyers. “More construction of single-family homes for sale in all markets would provide some affordability relief,” Hepp said.
Prices haven’t come down
Typically, when demand for homes is low (like in recent months), home prices tend to slip. But that hasn’t happened across the board.
Despite the lack of sales and a rise in mortgage rates, home prices haven’t budged much, due to historically low for-sale inventory, according to Erik Engquist, senior managing editor of housing-news site The Real Deal. “Some sellers who can afford to wait are asking very high prices because they are under no pressure to sell. These listings tend to sit on the market for a while,” Engquist said.
But experts say price drops could be on their way. “The national housing market is at an inflection point. With rates averaging around 8% and demand declining, we expect to see sellers capitulate on list prices,” said Moody’s Walsh.
What’s affecting housing affordability right now?
An increase in home loan applications could be a positive signal for the housing market. But it’s difficult to say whether a few days of mortgage rate dips will turn into a full downward trend. For now, housing affordability still remains at its lowest point in 40 years due to the triple impact of elevated rates, high prices and limited supply. Home insurance prices were also up 21% from 2022 to 2023, according to the insurance marketplace Policygenius, further compounding the problem.
Even so, many homebuyers have come to terms with the new reality simply because they have to.