How do mortgage rates affect housing demand?

It's been almost two months since it went up again, and my initial thought was that it would boost housing demand. We had a positive 18-week period with buy-to-let applications before mortgage rates, I thought these increases would create the same weakness in buy-to-let applications that we saw earlier in the year. But surprisingly, the demand has held up better than I expected. We're not growing as much as we used to, but we're not as negative as I thought. Let's take a look at the data.

Buy app data

We've had rising mortgage rates for six weeks and I expected buyout programs to be largely negative. Instead, we're flat from week to week with three positive and three negative purchase application data prints.

When mortgage rates were higher at the beginning of the year (6.75-7.50%), purchase application data looked like this:

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

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

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

I would expect more weakness as interest rates rise. I'm interested in the next few weeks because the last two years we've had demand for application data in the early spring, but that's with rates falling. Last week saw a 2% week-over-week increase, but a 1% year-over-year decline.

Weekly expected sales

Weekly pending contract data provides real-time demand information. As shown in the chart below, this data is seasonal in nature. Initially, the data showed a stronger performance as mortgage rates approached 6%. Today, pending contract data is higher than last year and remains steady despite rising mortgage rates. This caught my attention and is something I have been following closely.

The next time mortgage rates approach 6%, assume that the demand curve flattens out. But let's be honest here: we are operating from depressed sales levels.

10-year income and mortgage interest

I include:

• It is for mortgage interest rates between 7.25%-5.75%
• 10-year yield range of 4.25%-3.21%

This week was relatively quiet for mortgage rates, as the 10-year yield continued to hold steady at critical levels, ranging from 4.40% to 4.50%. Considering inflation data and statements the last two weeks could be interpreted as hawkish. However, the 10-year yield has managed to hold its ground and the downtrend seen in the charts is still in place as the 10-year yield is 5% in 2023. In addition, I noted that it usually changes in tandem with the 10-year income, and reaches its peak in a short period of time.

Mortgage spreads

The mortgage spread situation showed an improvement in 2024, in contrast to its negative performance in 2023. With these spreads improving, mortgage rates have been able to approach 6% at various times this year. Without this spread improvement, mortgage rates would currently be over 7.50%.

Spreads have worsened slightly since mortgage rates began rising in September, but they remain much better than the disastrous peak levels experienced in 2023. If spreads were as high as they were then, mortgage rates today would be 0.68% higher. Conversely, if we had average spreads, mortgage rates today would be about 0.75% to 0.85% lower.

Weekly housing inventory data

There was another slight drop in the active roster last week and the holidays will soon begin. I thought we might see a small supply before Thanksgiving week, but nope. The seasonal decline is well underway and the 739,434 level appears to be the peak of inventory for 2024.

• Weekly inventory change (November 15-November 22): Inventory has dropped 722,032 for 719,055
• Same week last year (November 17-November 24): Inventory fell 569,898 for 565,875
• The all-time inventory level was in 2022 240,497
• Inventory peak for 2024 so far 739,434
• For some context, these were the active listings for this week in 2015 1,104,310

New listing information

While active inventory hasn't increased, we've had a nice increase in new listings this past week. Still, when all is said and done, 2024 will be the second-lowest new listing year in history. We haven't seen all these terrible stress sellers on any scale YouTube bills have been pushing for years.

The goal for 2025 is to get new listings back to normal, meaning we should get between 80,000 and 110,000 new listings per week during the seasonal peak. During the housing bubble crash years, this data line ran between 250,000-400,000 per week for years. Here's the number of new listings for the past week over the last few years:

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

Price discount percentage

In an average year, one-third of all homes experience an event typical of the housing market. When mortgage rates rise, the percentage of homes that fall in price tends to rise. Conversely, this trend may slow when rates fall and demand increases, as rates have recently fallen. However, rates are high again. As we can see, we are at the same level today as we were last year, even with more inventory.

We present last week's depreciation percentages compared to previous years:

• 2024: 39.1%
• 2023: 39%
• 2022: 43%

Next week: Home prices, new home sales, bond auction and inflation data

This week is a holiday week, meaning not all hands are on 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 the 10-year yield's movements with some skepticism, as mortgage rates may fluctuate a bit more than normal this week. New home sales data will be especially important. For builders, the economic cycle and recent purchase application data have been positive.

While the labor data is more critical, we also have the Fed's PCE inflation data this week, which will factor into the next Federal Reserve meeting. House price data is expected to show a cooling trend in growth compared to highs earlier in the year. Also, keep in mind that jobless claims data can be unpredictable around the holidays, so it's important to keep that in mind over the next few weeks.