Steady Housing Demand Surges Despite Rising Mortgage Rates: Here’s Why!

🎉 The holiday season is upon us, and in a surprising twist, the housing market is showing some festive cheer despite rising mortgage rates. While we usually brace for a slowdown in activity at this time of year, there’s a seasonal spark igniting purchase applications this past month. Even better, pending contracts are reflecting an impressive double-digit growth year-over-year. Let’s dive into this week’s Tracker data and see if this momentum can carry us into the new year!

Weekly Pending Sales

The latest data from Altos Research gives us an insightful glimpse into the real-time happenings of the housing market. Yes, we’re experiencing the typical seasonal dip in volume, but don’t let that fool you. Even with last week’s uptick in mortgage rates, our pending contracts are still showcasing positive growth compared to both 2022 and 2023.

It’s important to remember that we’re rebounding from some historically low levels, so let’s keep our excitement in check. Nevertheless, it’s heartening to see signs of a stabilized bottom, something I touched on in my recent podcast episode.

Here’s a quick look at last week’s pending sales compared to previous years:

• 2024: 304,034
• 2023: 275,022
• 2022: 277,102

Purchase Application Data

This week’s purchase application data reveals a slight week-to-week dip of 4%. While the unadjusted figures show a hefty 30% increase, we generally take that with a grain of salt. Year-over-year, however, we’re hanging onto a solid 4% growth. Keep in mind, purchase applications forecast housing demand 30-90 days out, so what we see now is just the beginning!

Unlike the extraordinarily low figures from October and early November, we’re witnessing genuine growth trends this year. Admittedly, I wouldn’t be shocked if we see a different year-over-year result next week, but overall, purchase applications are outpacing expectations. Typically, the housing market begins its seasonal surge after the second week of January, but recent trends have seen activity surge as early as November.

Here’s how the weekly data has shaped up with the recent mortgage rate hikes:

• 5 positive prints
• 4 negative prints

Earlier this year, when mortgage rates hovered between 6.75%-7.50%, the purchase application data looked like this:

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

Once mortgage rates started declining in June, the purchase applications showed a different trend:

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

With the influence of rising rates still in focus, it will be intriguing to see if we hit another negative print next week. Rates certainly have an impact, but for now, we’re clinging to some year-over-year growth!

10-Year Yield and Mortgage Rates

Looking ahead to 2024, my forecast includes:

• Mortgage rates forecasted to range between 5.75%-7.25%
• 10-year yield expected between 3.21%-4.25%

Recently, the 10-year yield saw a sharp increase, jumping from 4.13% to 4.40% ahead of the pivotal Federal Reserve meeting. The Atlanta Fed also predicts U.S. economic growth could surpass 3% once again. While we’re witnessing some fluctuations in bond yields, expect the upcoming week to be a telling one as we test these upper levels before the Fed’s meeting.

Although mortgage rates have crept up, the rise hasn’t been as drastic as predicted. In fact, this week has shown improvements in mortgage spreads! Historically, housing demand tends to flourish when the 10-year yield dips close to 6%, igniting interest in the market.

Mortgage Spreads

I can’t stress enough how significant this year’s mortgage spreads have been for the housing market and our economy as a whole! If spreads had remained as unfavorable as last year, we’d likely be seeing fewer housing permits and possibly job losses in residential construction across several U.S. regions.

Despite recent increases in the 10-year yield, mortgage rates have shown resilience thanks to improved spreads. Had we faced last year’s worst spreads, rates today would be roughly 0.60 percentage points higher. Conversely, with spreads back to normal, we could be enjoying rates around 0.73%-0.83% lower. Last week serves as a prime example: even with rising rates, the housing landscape is still more favorable than last year’s due to these better spreads.

Jobless Claims

This week, I’m excited to introduce jobless claims data into our weekly tracker. This metric is critical, as a downturn in the labor market could push rates below my forecasted threshold of 5.75%. Specifically, if the four-week moving average for jobless claims approaches 323,000, it could indicate significant changes ahead.

Last week, we saw a noticeable jump in claims, largely attributed to holiday-related disruptions in labor data. Here’s the latest scoop: initial claims rose by 17,000, totaling 242,000, while the four-week moving average climbed by 5,750 to 224,250.

Weekly Housing Inventory Data

We’re currently experiencing a seasonal dip in housing inventory, which is quite standard for this time of year. However, the silver lining for 2024 is that we’ve built a solid buffer in our inventory levels—something we struggled with from 2020-2023. I’m optimistic about the inventory growth we’re seeing this year!

• Weekly inventory shift (Dec. 6-Dec. 13): Inventory slipped from 690,015 to 682,150
• Same week last year (Dec. 7-Dec. 14): Inventory fell from 546,424 to 538,767
• All-time inventory low was in 2022 at 240,497
• 2024’s highest inventory so far was 739,434
• For context, active listings for this week in 2015 were 1,050,780

New Listings

Last week’s new listing data showed its typical seasonal decline, but we also saw the traditional Thanksgiving bounce-back—a welcome sight. Since Thanksgiving arrived a week later this year, some data is slightly delayed. Nevertheless, it’s uplifting to witness growth in this area, even if it didn’t quite reach my target levels this year. Overall, this is a promising sign for the U.S. market, especially given how dismal new listings were in 2023, trending at all-time lows.

Here’s the new listings data from last week:

• 2024: 45,284
• 2023: 39,613
• 2022: 34,973

Price-Cut Percentage

In a typical year, about one-third of homes experience a price cut, which is a normal occurrence in the housing market. When mortgage rates rise, the percentage of homes that see significant price reductions tends to increase—and conversely, that percentage shrinks when rates drop and demand rises, as we’re starting to see now.

I initially anticipated more softness in home prices during the latter half of 2024. However, based on our data, it appears I may have been too conservative with my forecast of 2.33%. The cooling price growth in 2024 is yet another encouraging piece of news. One noteworthy point is that as housing demand picks up with mortgage rates nearing 6%, we’ve seen a shift in the price-cut percentage.

Check out last week’s price-cut percentages compared to previous years:

• 2024: 38.1%
• 2023: 38.0%
• 2022: 41%

The Week Ahead: It’s Fed Week, with Tons of Other Reports Too!

Brace yourselves for an action-packed week ahead, highlighted by the highly anticipated Fed meeting and a slew of critical economic reports. The language used by the Fed during this meeting will be pivotal. While a 0.25% rate cut is widely expected, many analysts anticipate that the Fed will proceed cautiously regarding 2025 unless economic data warrants a faster approach.

This week, expect to see Global PMI reports, bond auctions, builder survey indices, housing starts, existing home sales, retail sales, and much more. With the 10-year yield making significant movements last week, how the market responds to the Fed’s announcements and economic reports will be crucial.

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