Housing activity hits the brakes as mortgage rates surge
While the fall usually provides aspiring buyers with opportunities to enter the housing market, high mortgage rates are getting in the way for many this season.
Key points:
- Mortgage purchase and refinance applications dropped significantly as 30-year rates jumped to the highest levels in nearly three years.
- Pending home sales have fallen while contract cancellations and price cuts are on the rise.
- Inventory is climbing, but a ceiling may be inevitable as a lack of equity growth makes it tougher for sellers to put their homes on the market.
The recent surge in mortgage rates has significantly slowed housing market activity in a period that traditionally provides the real estate industry with one last flurry before the fall and winter holidays.
Weekly average rates near 7.3%, daily rates hover around 7.6%
The mortgage rate uptick recorded at the end of September marked one of the largest one-week escalations of the past four years despite the Federal Reserve's ongoing efforts to cool inflation. Freddie Mac's latest weekly survey pegged the 30-year rate at 7.28%, up 25 basis points from the week before — the biggest weekly jump since October 2022 — and the highest weekly average recorded in nearly three years.
Mortgage News Daily, which uses a different set of metrics to gauge rates, has shown the 30-year rate accelerating this week, with the daily rate hitting 7.6% on Sept. 30 before dropping slightly to 7.54% in the morning on Oct. 1.
The recent surge is tied to the 10-year Treasury yield, which reached its highest levels in over 24 years amid a major sell-off as investors grew increasingly concerned about broader economic uncertainties heading into the final quarter of the year.
So what would it take to stop the surge? According to Hannah Jones, senior economist at Realtor.com, rates "would likely ease if oil prices retreat, inflation keeps cooling, or labor market data softens enough to strengthen expectations for Fed rate cuts."
Loan activity drops off
Overall mortgage application activity dropped 6% for the week ending Sept. 25 compared to the week before, according to the Mortgage Bankers Association (MBA). The number of applications submitted by those wanting to purchase a home dropped 14% year-over-year, while refinancing applications have fallen a whopping 56%.
However, with the 30-year fixed-rate mortgage unappealing to many at the moment, the share of adjustable rate mortgages is climbing, MBA VP and Deputy Chief Economist Joel Kan noted.
A downshift is underway
The recent rise in rates comes amid the four- to six-week period in which buyers usually have the most leverage. The housing market's peak season has passed, and sellers who are still in the market will want to move their homes before potential buyers turn their attention to the upcoming holidays.
"Buyers have more options at lower price points, but elevated mortgage rates keep homeownership out of reach for many," Jones said.
Rising rates have had a predictable impact on other gauges of housing market health. Pending sales in the past week were down 6.1% compared to a year ago, while cancellations hit 13% — the highest level since 2022, Compass Chief Economist Mike Simonsen said in his weekly YouTube update. Nearly 43% of homes that are on the market have taken a price cut, while national home prices remain basically unchanged since 2022.
Inventory is growing, but a ceiling may be coming
"If you zoom out a bit, home prices actually have not moved much up or down in four years," said Simonsen, who used the price per square foot in his measuring. "The important takeaway, in my opinion, is that a lack of equity gains in recent years makes it harder for homeowners to sell. So that implies to me that we have a ceiling on the number of sellers" who will pop up next year.
"There's a lid on how much inventory can grow," Simonsen added.
Meanwhile, regional differences are starting to widen. In its September trends report, Realtor.com noted that median list prices fell more significantly year-over-year in the Northeast (down 3.8%), and the South (down 2.4%) compared to the West (down 0.8%) and the Midwest, where prices held flat.
"Local supply, affordability, and rate sensitivity are increasingly determining how quickly each market adjusts," said Jake Krimmel, senior economist at Realtor.com.
For now, inventory is growing nationally. But that's not because more sellers are entering the market. "Since the new listings rate is roughly the same as it was a year ago — but there are slightly fewer sales happening each week — those handfuls of unsold homes start to accumulate in the active inventory," Simonsen explained.
"We should expect supply to continue to build relative to a year ago as mortgage rates stay elevated in this cycle," he added.