Mortgage Applications Rise As Rates Continue To Fall Back

Prospective homebuyers have been waiting for more affordable conditions, and according to data from the Mortgage Bankers Association, they might be ready to start making offers. Mortgage demand surged 7% in the week ending January 20th after skyrocketing nearly 28% the week prior. While there have been variations in mortgage demand, often following fluctuations in the federal funds rate, a 28% increase in the volume of mortgage applications hasn’t occurred since the first week of March 2020. 

Meanwhile, inventory isn’t growing to keep pace. Homebuyer sentiment improved slightly in December. Inflation is moderating faster than some recent expectations, and a growing cohort of economists are betting the Fed will pull off a soft landing. Did we manage to avoid a housing market crash, and is the housing market already making a comeback? 

Mortgage Demand Is Rising Surprisingly Fast

While fluctuations in demand are common, the 27.9% jump in mortgage applications during the week ending January 13th is the steepest recorded since the onset of the homebuying boom in 2020. Refinance activity made a particularly robust comeback, surging 34% from the week prior, while home purchase applications were up 25%. 

In the week ending January 20th, refinance applications jumped another 14.6%, while home purchase applications rose 3.4%. 

Mortgage activity today still pales in comparison to a year ago, however. In the week ending January 13th, refinance demand was 81% lower than the previous year, while home purchase applications were down 35% compared to the previous year. At that time, the average 30-year fixed mortgage rate was only 3.64%. 

While mortgage rates are still higher than they’ve been in a decade, they’ve decreased significantly from a peak of 7.08% in November. The average mortgage rate for a 30-year fixed rate home loan now sits at 6.13% after steadily decreasing over the last three weeks. Meanwhile, more sellers are offering concessions and accepting under-asking offers. While conditions may not be ideal for buyers, they’re getting more favorable. That’s causing demand to rebound at a time when inventory is still low. 

Uncertainty Remains

While mortgage rate forecasts for 2023 vary from one firm to the next, December’s inflation data suggest that the Fed’s efforts are working. Used vehicle prices, which fueled inflation in past years, have begun to come down, for example. It’s possible mortgage rates could decrease further in 2023 if the consumer price index continues to fall. On the other hand, the battle against rising prices is far from over. Services inflation has ticked up month-over-month. The Fed has indicated that it will continue with rate hikes, though slower increases of 25 basis points are expected. 

There’s reason to be optimistic that the Fed will get inflation under control without causing a recession. Despite stories of layoffs in the tech sector, unemployment remains low, and there are more job openings than unemployed Americans — even as rate hikes are causing a contraction in economic activity and inflation begins to slow. Some economists are now expecting a milder recession than they originally predicted. 

But the pandemic has managed to continue impacting certain parts of the economy and disrupt supply chains. And the Fed has a long way to go before reaching its target inflation rate. The higher interest rates could begin impacting employment, causing a recession and waning homebuyer demand. 

Is The Housing Market Making a Comeback?

Some cities may be poised to rebound sooner than others since home prices have already fallen from a year ago in some pandemic boomtowns. The housing correction is well underway in cities like Austin and San Francisco, which means a turnaround in prices may happen sooner rather than later as buyer demand picks up again, according to Redfin Economics Research Lead Chen Zhao. But it’s too early to tell if most markets will pick up speed this year. Many buyers and sellers may be waiting to see where prices land, leaving new inventory stalled and dampening demand.

Even if a rebound in homebuying activity occurs nationwide in 2023, it’s unlikely to parallel the homebuying boom of 2021. Interest rates are likely to remain relatively elevated. At a time when mortgage affordability is a concern for prospective homebuyers, economic fears are palpable. Worries about job loss may curb the demand for homes, even if unemployment remains low. Homebuyer sentiment, while rising, remains well below 2021 levels. 

With so much uncertainty, it’s even more important for investors to track weekly metrics on housing demand, like weekly data about mortgage applications from the Mortgage Bankers Association. The housing market may not be making a comeback just yet, but keeping an eye on mortgage application activity can help you make informed decisions about the best time to buy. 

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.