Real Estate Data: Is Mortgage Demand Declining as Buyers Respond to High Interest Rates, Low Supply?

Main points

Mortgage applications fell 1.9% from the previous week to the week ended December 2, with many potential home buyers expected to wait to see what this week's rate hike announcements will look like.
Mortgage rates fell for the fourth week in a row on positive inflation data, but potential home buyers are still wary of volatile mortgage rates fueled by the Fed's aggressive rate hikes.
Pending existing unit home sales fell 4.6% in October, making it the fifth straight month of declines.
We saw house prices skyrocket during the pandemic as people took advantage of low interest rates, fled cities and found themselves crammed into home offices. With aggressive interest rate hikes and fears of a recession, the real estate market has changed in 2022.
The real estate market has been expecting a decline for some time; Historically, home prices fall when interest rates rise. However, this was not the case in 2022 due to a unique set of circumstances. Let's look at mortgage demand to see if it is actually going down (or up).

The current housing market

When the pandemic first started in 2020, there was a lot of uncertainty about what would happen to the real estate market, as no one knew what to expect. When the economy came to an abrupt halt, the government scrambled with stimulus and lowering interest rates.
Mortgage rates fell to a record low of 2.65% in January 2021. With low interest rates and an unprecedented amount of workers now working from home, there has been a real estate boom.
But that boom quickly began to recede. In June 2022, inflation hit a 40-year high of 9.1 due to the combination of easing pandemic restrictions, supply chain disruptions, a strong labor market and astronomical housing prices, so central banks got involved. The Fed has embarked on an aggressive interest rate hike to slow the overall economy.
A lot has changed since 2021, when people took advantage of low interest rates to get into the real estate market. Mortgage rates rose to an average of 6.43%, as the Fed's interest rate stands at nearly 4%.
Many potential buyers on the side are waiting for interest rates to drop or housing prices to drop. Many experts believed that the inflated housing prices together with the increase in mortgage rates would be enough to slow down the real estate market. Inflation numbers and housing prices remain stubbornly high, but are showing signs of slowing.

What is happening with mortgage demand?

The volume of mortgage applications decreased last week by 1.9% compared to the previous week, based on data from the Mortgage Bankers Association. Applications for mortgages to purchase a home decreased by 3% in the week, with an overall decrease of 40% year-on-year.
On the other hand, refinancing applications fell 86% year over year despite a 5% increase from the previous week. Mortgage rates have decreased slightly in recent weeks, but remain high compared to the years before the pandemic (more on that in the next section).
These slightly lower mortgage rates seem to have attracted current homeowners to refinance, but they have not been enough to entice more new home buyers. There is speculation that many people are focusing on saving given the uncertainty regarding the economy and a possible recession.
The average loan size for a mortgage application fell to $387,300 - the lowest number since January 2021. There, the price index data for the month of November will be published in the coming days, and these data will play a vital role in mortgage interest rates and how the Fed moves forward with interest rate increases.
On a positive note, the inflation rate dropped to an annual rate of 7.7% in October. While these numbers aren't exactly celebratory, many analysts felt it meant prices had finally come down.

The interest rate on the mortgage is going down

According to Freddie Mac, the 30-year fixed-rate mortgage averaged 6.33% for the week ended December 8. This rate is down from 6.49% a week ago as reports indicate that stubborn inflation numbers may be coming down from their peak.
Sam Khater, chief economist at Freddie Mac, noted that despite a significant drop in mortgage rates, homebuyer sentiment remained low, and there was no surge in demand for purchases with the lower interest rates.
We also cannot ignore the role of inflation in savings. As people spend more money on everyday items, they may not be able to save for a down payment as quickly as they once could.

Housing supply problems

Last year, the National Association of Realtors predicted that the housing market needed about 5.8 to 6.9 million new homes to satisfy supply problems. NAR Chief Economist Lawrence Yoon commented, "There is a strong desire for home ownership across this country, but the lack of supply is preventing many Americans from realizing that dream."
The lack of supply is believed to have prevented prices from falling more drastically as people still need somewhere to live. These figures cannot be ignored because the continued interest rate hikes can only hurt those with variable rate mortgages who are now spending more on their monthly payments.

What is happening with home sales?

The National Association of Realtors (NAR) recently released data on home sales. In October, sales of existing homes decreased by 5.9% from the previous month. Sales were down 28.4% year-over-year, falling from 6.19 million in October 2021. Properties stayed on the market for about 21 days in October, up several days from the 19 days in September. It is also worth mentioning that first home buyers accounted for 28% of sales in October.
The annual share of first-time home buyers reached 26%, the lowest figure since NAR began tracking data. There is a lot of speculation because many potential home buyers simply chose to invest in other properties.
According to other data released by the NAR, pending home sales in October fell 4.6% from the previous month, marking the fifth straight month of declines. Pending home sales data is critical because a sale is listed as pending when the deal has been signed but the deal hasn't gone through. There were problems with people qualifying for mortgages because of the higher rates.
New home starts also fell by 8.8% in October on an annual basis. This decrease was due to the increase in construction prices, the overall price increase in the economy and fluctuating mortgage interest rates. U.S. First Deputy Chief Economist Odette Koshi revealed that prices for building materials such as plywood, steel and concrete were all much higher than they were in the pre-pandemic era. Koshi also talked about how average hourly earnings in construction rose 6.6% in October on a year-over-year basis. The increase in construction prices and the decrease in mortgage applications led to the withdrawal of builders. The increase in interest rates also affects the achievement of housing.
In addition, homebuilder sentiment in the single-family housing market fell to its lowest level since June 2012. As builders face problems with labor and material costs that lead to lower demand, the National Association of Home Builders index rose to 33 in October. This is the 11th consecutive monthly decline in this index.

What awaits us in 2023?

Many experts have chimed in with predictions about what we can expect from the real estate market in 2023. Morgan Stanley expects home prices to drop 10% from June 2022 to 2024. So while they don't expect a real estate crash, they do expect a market correction.
Redfin recently released their real estate forecasts for 2023, where they shared that they expected 30-year mortgage rates to slowly decline until they hit 5.8% towards the end of the year.

How should you invest?

Judging by the drop in mortgage applications, there is less demand, which may ultimately lead to lower prices in the housing market. If you are looking to purchase real estate in the near future, you may not be sure how to invest your money while you wait for prices to drop.

The bottom line

As interest rate hikes continue, there is concern that the economy could tip into a recession. All we know for sure is that markets will be paying close attention to this week's CPI data to see if interest rate hikes have done enough to cool the economy overall.
If interest rate hikes continue as the Fed has indicated, then mortgage interest rates will continue to remain volatile in the near future, which will certainly affect the demand for mortgages.