The housing market experienced more volatility last week, with housing inventory falling as mortgage rates rose.
Here's a quick review from last week:
- Purchase application data had a 3% weekly increase. The start to 2023 has been good, considering mortgage rates have stayed above 6% most of the time.
- Weekly housing inventory continues to decline as we saw a drop of 13.238 units, twice as many as this time last year. However, we are working from a higher level in 2023.
- The 10-year yield rose aggressively, continuing the decisive move from jobs on Friday, and mortgage rates have moved from recent lows of 5.99% back to 6.50%.
Acquire application data
We saw a 3% weekly increase in purchase applications, and the year-over-year data is improving, although it's still down 37% from a year ago. The extremely high comps we dealt with from October 2022 to January 2023 are coming to an end, which means we should see year-over-year declines moving down each month, even if the data is just flat.
Last year we had a historic slump in purchase app data, but recently we have found a bottom and purchase apps have recovered from the lows. Since the 9. November, when this data line began to improve, and apart from the traditional extreme slowdown in the last and first week of the year, it was positive outside of one week. I'm keeping an eye on how much growth we can get with mortgage rates above 6%.
This week we will get a good test with the purchase application data, as mortgage rates have increased recently. I'm curious to see how the data responds to higher rates. In contrast to the quick and sharp recovery of COVID-19, we are now dealing with a completely different background. Mortgage rates are higher and we are also working with much higher home prices.
The only upside to the housing market now is that the days on the market are no longer in the teens, which means we're approaching a more balanced market. This means buyers now have more say in the home buying process. Finally, all the positive data we have seen since the 9. November have seen 30-90 days into the future, so existing home sales will show better data.
Weekly apartment inventory
When I saw a slight increase in housing inventory in January, I was very excited because part of the drop in demand we saw in the second half of 2022 was due to people choosing not to list their homes because they were afraid to buy another one. So when I saw the slight increase in inventory, I thought that was a good trend.
Prior to 2020, weekly housing inventory bottomed out in January/February, and then the seasonal spring surge would begin. From 2014 to 2016, housing inventory bottomed out in January. From 2017 to 2019, January and February inventories were very close before the seasonal push higher.
However, since 2020, this has not been the case – inventories have tended to bottom out a bit later in the year. In 2021, inventories bottomed Apriland in 2022, inventories bottomed March.
Housing inventory has declined significantly over the last two weeks, and I hope we are nearing the bottom of the seasonal inventory decline. Unfortunately, we saw a larger inventory drop last week than the previous week as units declined 13.238 According to Altos research.
So I'm keeping my fingers crossed that we're nearing the end of the seasonal inventory decline, because the last thing we want to see is renewed bidding wars, especially if demand is starting from a much lower level than in 2020/2021 early 2022. On the positive side, inventories are still higher than a year earlier
- Weekly change in inventories (3. Feb. – 10. Feb.): Dropped out 456.990 To 443.416
- Same week last year (4. to 11. Feb): fell 255.662 To 249.161
Since I could see that housing demographics would be good in 2020-2024, I really didn't want inventory to fall to all-time lows during that period. This reality made me fear that housing prices would overheat, which they did, and as mortgage rates rose, the housing market took an extreme hit to affordability. Last year we had a historic drop in housing demand and didn't get much inventory.
Unfortunately, we have a good shot at the next existing home sales report, which shows even lower inventory levels than the 970.000 level that we're dealing with today. This means that 2022 and 2023 are the only times in recent history that NAR active listing data have been below 1 million.
10-year yield and mortgage rates
In my 2023 forecast, my 10-year yield range was in between if the economy remained stable 3.21% and 4.25%which equates to mortgage rates staying in a range of5.75% to 7.25%. For some time I have discussed how hard it would be to break below 3.42% with subsequent bond buying, meaning mortgage rates would continue to fall. The market made some attempts to break this level, but now bond yields have turned upward.
The question this week with the release of the CPI report data is whether a W will form on this chart, which would mean bond yields will fall back to 4.25%, or whether the downtrend will continue. Over time, the rate of inflation growth will cool once rents are factored in real time.
Part of the 2023 forecast is also that the 10-year yield could fall if the labor market collapses 2.72%, which would mean mortgage rates in the low 5% range. And if spreads get better, we might even have a 4-grip on mortgage rates. For now, however, the labor market remains solid.
The week ahead
This will be an exciting week for economic data, bonds and real estate. First and foremost, this week's purchase application data is crucial. It will be the first app data to raise mortgage rates by half a percentage point, and the next few weeks will also be crucial if rates stay at 6.50% or go higher. Remember to prioritize numbers over people; if tracker data goes negative, go with data rather than a personal belief.
The big interest rate move this week is likely to be the consumer price index report. If things are hotter than expected, bonds could have a negative impact on this report. Also this week, we have unemployment claims, retail sales, producer price index inflation, the builder confidence survey, housing starts and the leading economic index!
It will be a busy week with economic data that could move the bond market and mortgage rates. One thing is certain from the data: falling mortgage rates, even to as low as 5.99%, have shifted the housing market, something we should remember as we move forward