Will we see a Santa Claus rally in mortgage rates?

Despite initial concerns, this week brought some encouraging news, down to 8% and reducing housing demand. The 10-year yield held steady at an important technical level and even reversed direction and eventually improved. In addition, despite high mortgage rates, the demand for housing has increased surprisingly.

Although the increase in demand is not significant, it is still a positive development and worth celebrating! Let's take a look at the latest housing data to get an idea of ​​the market as we approach the end of the year.

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%

The recent decline in mortgage rates can be attributed to dynamics in the bond market and sentiment among bond traders. They see potential gains in buying the 10-year bond at current levels, especially now that it has peaked and declined in the short term.

Previously, there was serious concern about the possibility of a new wave of inflation that would require interest rate hikes, which I recently threw cold water on. However, the last peak for the 10-year yield was around 5% in 2023, and the downward trend continues for now. So unless the economic data surprises to the upside, bond yields should stay away from 5%, meaning mortgage rates won't approach 8%.

When I talk about a Santa Clause rally, I mean people buying the 10-year yield and lowering mortgage rates because of the slow dance between the 10-year yield and mortgage rates. This is what happened in the last two years. We will see a repeat this year.

Mortgage spreads

Mortgage spreads improved in 2024, especially compared to the difficult times of 2023. Thanks to this positive change, mortgage rates reached 6% in 2024, before the 10-year yield reached 3.37%. Imagine if spreads hadn't improved — mortgage rates could be over 7.50% right now!

While we've seen a slight increase in spreads since mortgage rates began rising in September, it's worth noting that they're still well above the peak levels we experienced last year. If spreads remained as high as they were in 2023, mortgage rates today would be about 0.60% higher. On the other hand, if we look at the average spreads, we would see that mortgage rates will decrease by about 0.93% to 1.03%. Overall, it's encouraging to see progress in the mortgage market!

Weekly expected sales

Weekly pending contract data gives us an extraordinary view of real-time housing demand. It is interesting to see how this data follows seasonal trends, as shown in the chart below. Initially, we saw some solid performance when mortgage rates were near 6%. Despite recent higher mortgage rates, it is encouraging to see pending contracts continue year over year. This trend has piqued my interest and I'm happy to keep an eye on it! Imagine that mortgage rates stayed between 5.75-6.25% for 12 months.

Here are the expected weekly sales for the past week over the previous several years:

• 2024: 317,080
  2023: 296,615
  2022: 299,312

While our pending contract data showed a year-over-year increase months ago, NAR's pending home sales have now caught up.

Buy app data

It was quite surprising recently. When mortgage rates rise from a downtrend, the effects are negative for a while. However, last week's shopping apps data showed a 12% week-over-week increase, which is a positive trend for the previous seven weeks, which wasn't on my bingo card for the holidays. Last seven weeks:

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 start falling in mid-June, purchase applications look like this:

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

With two years of data, we see a positive upward trend in buyout programs as mortgage rates approach 6%.

Weekly housing inventory data

Housing inventories fell last week, which is typical for this time of year. We should expect a decrease in inventory until the spring season starts to heat up again. Inventory will peak at 739,434 in 2024, which is not a normal level for inventory, but at least we've seen good, healthy growth this year. Year-over-year inventory growth is the top housing story for 2024.

• Weekly inventory change (November 22-November 29): Inventory has dropped 719,055 for 706,554
• Same week last year (November 24-November 30): Inventory fell 565,875 for 555,717
• 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 1,082,020

Currently, new listings data is experiencing a seasonal decline, with a slight dip last week. We can expect an even more significant seasonal drop this week.

While I don't estimate the increase in new listings to 5,000 during peak seasonal weeks, it is encouraging that we see growth in 2024. However, it should be noted that both 2023 and 2024 will be marked as the two lowest years for new listings. . The idea that many homeowners will rush to sell their homes is a mistake. American homeowners don't behave like stock traders or get caught up in sensational online content. YouTube convicts. They just go about their normal lives every day.

New listing information for last week:

• 2024: 51,800
• 2023: 28,297
• 2022: 28,471

In an average year, about one-third of all homes experience a situation 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 we saw recently when rates fell. However, mortgage rates have risen again. Although we have more inventory, we are at the same level as last year.

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

• 2024: 38.7%
• 2023: 39%
  2022:43%

One thing I wonder about in the 2nd half of 2024 is how sustainable our new home price index is expected to be in the mild seasonal period of higher inventory and mortgage rates above 6%.

Next week: Work week!

There will be a lot to discuss this week – it's the most critical week of the month for economic data because it's business week! We have several key reports, including jobs, the ADP report, jobless claims, and the important BLS Jobs report scheduled for Friday. We've already seen a significant drop in yields, so it will be interesting to see what happens next with mortgage rates. We also have ISM data, bond auctions and some Fed presidents talking. So, buckle up again and let's see how the bond market reacts to this week's data.

Related