What influence does mortgage interest rates have on the demand for housing?

It’s been almost two months since mortgage rates spiked again, and my first thought was that this would reduce housing demand. We had a positive 18-week period of purchase requests before mortgage rates started to rise in September. I thought these increases would cause the same weakness in purchasing apps that we saw earlier this year. Surprisingly, though, demand held up better than I expected. We’re not growing like we were before, but we’re also not as negative as I thought. Let’s take a look at the data.

Buy application data

We’ve had six weeks of rising mortgage rates and I expected purchasing apps to be mostly negative. Instead, we remain flat, with three positive and three negative purchase request data on the weekly data.

When mortgage rates rose earlier this year (between 6.75%-7.50%), the purchase application data looked like this:

• 14 negative prints
• 2 flat prints
• 2 positive prints

When mortgage rates began to fall in mid-June, purchase applications responded as follows:

• 12 positive prints
• 5 negative prints
• 1 flat print

I expected more weakness as rates rose. I’m curious about the next few weeks because the last two years we had a request for application data in the early spring, but that was when rates were falling. Last week it was up 2% week on week, but down 1% year on year.

Weekly ongoing sales

The Alto’s research weekly ongoing contract data provides insight into real-time demand. This data is generally seasonal, as shown in the chart below. Initially, the data showed more robust performance as mortgage rates approached 6%. Even today, current contract data remains resilient despite higher home prices and mortgage rates than last year. This has caught my attention and is something I am following closely.

The next time mortgage rates move toward 6%, we assume the demand curve will improve. But let’s be honest: we work from a low sales level.

10-year interest rate and mortgage interest rate

My prediction for 2024 included:

• A mortgage interest rate range between 7.25%-5.75%
• A bandwidth for the ten-year interest rate between 4.25% and 3.21%

This week was relatively quiet for mortgage rates, as the 10-year rate remains stable at a critical level, ranging from 4.40% to 4.50%. Given the inflation data and statements from the Federal Reservecould have been interpreted as aggressive over the past two weeks. However, the 10-year yield has managed to maintain its position, and the downward trend observed in the charts since the 10-year yield reached 5% in 2023 is still present. Additionally, I noticed that the Citigroup economic surprise indexwhich usually fluctuates along with the 10-year interest rate, also peaks in the short term.

Mortgage spreads

The mortgage spread situation has improved in 2024, in contrast to the negative performance in 2023. As these spreads have improved, mortgage rates have been able to approach 6% at various times this year. Without this spread improvement, the mortgage interest rate would currently be over 7.50%.

Spreads have deteriorated slightly since mortgage rates started rising in September, but they remain well above the disastrous peak levels of 2023. If spreads were as high as they were then, mortgage rates would be 0.68% higher today. Conversely, if we had average spreads, mortgage rates would be about 0.75% to 0.85% lower today.

Weekly home inventory data

Last week there was another slight decrease in the number of active listings and the holidays will soon begin. I thought we would see a small increase in supply before Thanksgiving, but no. The seasonal decline is in full swing and it looks like the 739,434 level will be the stock peak for 2024.

• Weekly Inventory Change (November 15 – November 22): Inventory decreased from 722,032 Unpleasant 719,055
• Same week last year (November 17 – November 24): Stock fell from 569,898 Unpleasant 565,875
• The lowest inventory level of all time was in 2022 240,497
• The inventory peak for 2024 so far is 739,434
• For some context, the active listings for this week in 2015 were 1,104,310

New advertising data

Although active stock did not increase, we did get a nice boost in new offers last week. Still, when all is said and done, 2024 will be the second-lowest year in new listing history. We have never seen so many stress sellers who are so terrible YouTube bills have been pushing for years.

The goal for 2025 is to return new listings to normal, which means receiving between 80,000 and 110,000 new listings per week during the peak seasonal period. During the housing bubble crash years, this data line was between 250,000 and 400,000 per week for years. Here you will find the number of new entries from the past week over the past years:

• 2024: 53,220
• 2023: 48,587
• 2022: 45,859

Price reduction percentage

In an average year, a third of all homes experience a price drop, which is typical for the housing market. When mortgage rates rise, the percentage of homes that reduce their price typically increases. Conversely, this trend may slow when interest rates fall and demand increases, as recently when interest rates fell. However, the rates are higher again. As we can see, today we are at the same level as last year, even with more inventory.

Here are last week’s price reduction percentages compared to previous years:

• 2024: 39.1%
• 2023: 39%
• 2022: 43%

Coming up next week: home prices, new home sales, bond auctions and inflation data

This week is a holiday week, which means not all hands are at the trading table, so we may see some volatility in the markets, especially with some bond auctions taking place. Markets will normalize after Thanksgiving, so it’s important to view 10-year yield movements with some skepticism as mortgage rates could fluctuate a little more than normal this week. The new home sales data will be particularly important as it reflects the economic cycle and recent builder purchase request data has been positive.

We also have the Fed’s PCE inflation data this week, which will be a factor for the next Federal Reserve meeting, although the labor data is critical. House price data is expected to show a cooling trend in growth compared to the highs earlier this year. Additionally, keep in mind that unemployment benefits data can be unpredictable around holidays. It is therefore important to take this into account in the coming weeks.