How quickly will rising mortgage rates affect home buyers this spring?
How quickly will rising mortgage rates affect the surprisingly resilient spring home buyer? The interest rate on a 30-year fixed mortgage is now at 7%. The rates were below 6% just a few weeks back. The rate’s nearly 100 basis point change has a significant effect on affordability and payments. This means that there will be fewer buyers on the market.
The question is: Where in the data will we see fewer homebuyers? How long will it take for buyers to stop buying if there are higher mortgage rates?
Homes under contract and sales pending
This week, fewer homes were sold than pending sales. Buyers who are active in the market this year may be thinking, “Since rates rose from 6-7% to 6%, maybe I’ll wait until they fall back before I lock in my payments.”
As the homebuyer mindset shifts there will be fewer homes accepting offers and signing contracts. This shift is evident in the first data point of the pending sales data for this week.
This week, there are 6% fewer pending home sales. Altos monitored 55,000 single-family houses that went from active listings to homes under agreement this week. This is a decrease from 58,000 homes last Wednesday. This is just one data point. However, if you look for signs homebuyers react strongly to an increase in mortgage rates, you will see it.
If your potential mortgage payment increases dramatically in one week, you might consider holding off on making an offer. This is the exact opposite of what was happening back in February 2022. Rates were still within the 3% range back then, but they were clearly heading higher. Buyers knew that they needed to accelerate their offers in early 2022. Buyers are now waiting for the right time.
Each bar in this chart represents a week, with the total number of single-family homes currently in the contract pending phase. The higher the bar, the greater the number of homes in contract. These are homes that were originally listed for sale and accepted an offer. They are now within the 30–60 day window between the offer being accepted and the close of the sale. The homes that are currently pending each week are represented by the light portion of this bar.
Although a difference of 6% in light bar is difficult to see from this perspective it is there. This is notable because the number of pending sales has been increasing each week through 2023.
The number of homes under contract continues to rise. 306,000 single-family homes remain in the pending stage. The chart below can be used as a guideline for home sales in the country.
These sales will close in March or April. The chart’s right-hand side shows the steady increase in home sales since the low start in 2023. It’s spring so even though the pace of recovery slows down due to higher mortgage rates the total number of homes under contract will continue climbing through June due to more transactions. This trend is more than seasonal buying habits. It’s a rebound from the fall 2022.
Although there were slightly fewer pending sales this week, there were also fewer complete sales. The total number of pending sales is increasing. Last week, there was 23% less homes under contract than there was at the tail of the buying frenzy that occurred in 2022. If a contract is cancelled and the home is relisted for sale it will be removed from this chart and added to the active inventory.
Every week, active inventory is falling. The number of single-family homes available for sale in the United States fell by 1.5% to 436,000 this week. This market is difficult to find sellers. There is a lot of demand, but very few sellers, so inventory has fallen.
The weekly inventory decline is slowing. This means that supply demand imbalance is improving as spring approaches. It will take two more weeks until we reach the 2023 inventory low point. If inventory continues to fall into March, this would be the next surprising development in an already surprising year in housing.
Inventory would rise by this time in 2019 and earlier. In the chart above, I have highlighted 2019. In 2019, inventory was at its lowest point in January and February. Inventory had been rising for a few more weeks by February 2019 and there were 820,000 single-family homes available. This is almost twice the amount of homes available to buyers today. There was once more supply, and it is growing now. I was expecting this year to be more like 2022 than 2019. But I was wrong.
This week, there were only 55,000 single-family houses that were newly listed. This is 24% less than the 2022 listing. There were also more bidding battles and immediate sales in 2022. There were few sellers in 2022, but there was a lot of demand. There are fewer sellers this year and a lower demand. Each bar in the chart below represents the number of new listings for a given week. The light part of the bar is for homes that were in contract within a few hours after listing.
America’s homeowners are retaining their extremely-low-cost mortgages. Why should you sell the best financing deal? Even though I’m buying a home new, I won’t give up my existing home with a 2-3% mortgage. That’s what I believe is happening here. It is possible to hypothesize that American homeowners are locked in to their extremely-low-cost mortgages. We can also see this play out in the data. You can see how few home owners are coming out each week at the right end.
We don’t know yet how 7% mortgage rates might impact spring demand. There is a lot of buyer momentum and we can see this trend through the price reduction data. Currently, 31.3% have had their prices reduced in the U.S. This indicates a dramatic improvement in demand relative to 2022. You can see how steeply the dark-red line is falling in this chart.
The spring and summer 2022 were notable for the rapid price drops by home sellers. Now it is the opposite. The curve is the light red line from last year. About a third of the market will accept a price reduction before the home sells in “normal” times. Since March is when all new inventory goes live, there have been fewer price cuts in recent years. If the home isn’t sold by Q2, the price reduction data starts climbing.
Only 15% of the market accepted a price reduction in the last two years of housing market chaos. There were bidding wars, and insatiable market. In the summer 2022, there was a sudden change in demand. The cold stopped selling and buying. Now we see the opposite.
There are more homes available now with price reductions than in February. The chart’s slope shows how quickly the market is returning back to normal.
What if rates were to remain at 7% or rise? They could rise because of the strong growth numbers reported by almost every front. As a gauge of how fast demand is being cut off, price reductions are important.
The dark red line will curve and then begin to rise. Does it get under 30%? Are we going to get back into the cluster of all the previous years? Or will the trend reverse? Will it head higher like last year’s?
Sellers don’t need to lower their prices because they start at lower asking prices. This week, the median price for single-family homes in the U.S. is $419,000. This is a tiny increase of 0.1% from last week. Although home prices rise in February, this year’s decline is quite modest. Prices rose each week in 2022 because sellers knew there was strong buyer demand. The trajectory of the dark red line to the right can be seen. It’s going lower than last year’s peak. This pricing peak is almost always June 30, each year.
The light red line can be used to gauge the future home price trends. This is the weekly price of the newly-listed cohort. The light red line on the far right is going in the opposite direction to the chart. This is a sign that home sellers are telling us where buyers are buying. The new listings are priced at $393,000, which is almost unchanged from last year. The home prices are already flat compared to a year ago. I expect prices to fall below 2022 in the coming weeks.
Even though the market is experiencing an increase in supply, the demand for homes is still very clear at certain price points. You can see that affordability is a key factor for home buyers in the charts.