Mortgage Rates Drop. Buyer Demand Surges by 25% in One Week.

Mortgage Rates Drop. Buyer Demand Surges by 25% in One Week.

The 2023 Housing Market has gotten off to an interesting and volatile start. In particular, there are two big trends taking over the Housing Market in January that both homebuyers and real estate investors need to pay attention to.

The first trend is 1) declining Mortgage Rates. After the 30-Year Fixed Mortgage Rate peaked at 7.08% in November, it's gone down to 6.17% in the last two months. Marking one of the biggest two month declines in the cost of borrowing in recent history.

Mortgage Rates in America are on the decline, from 7.1% to 6.2% in only two months.
The 30-Year Fixed Mortgage Rate declined to 6.17% in mid-January. (Source: FRED)

This drop in Mortgage Rates shaved nearly $150/month off the typical mortgage payment for homebuyers. The result of this increased affordability, at least in the short-term, is a second trend...

2) An increase in buyer demand.

The Mortgage Bankers Association just released their weekly Mortgage Application Survey and it showed a hefty +25% surge in applications to buy a house for the week of January 18th (see below).

Homebuyers returned to the Housing Market in January. But buyer demand is still suppressed.
Homebuyer demand increased by 25% in mid-January. But is still down 35% YoY. (Source: Mortgage Bankers Association)

Mortgage Applications typically "lead" Home Sales by about 1-2 Months. So higher Mortgage Applications today means that there will likely be more closings in the Housing Market in February than there were in December or January.

Mainstream financial outlets like CNBC, as well as a slew of Realtors on YouTube and Instagram, are firing up the Hype Machine and interpreting this news as a sign that the Housing Market is "recovering".

However, there's a problem with this take. Two problems in fact...

Problem #1: Buyer demand is still down 35%.

A different interpretation of this data focuses on the fact that Mortgage Purchase Demand, measured currently at an index level of 199, is down a massive 35% year-over-year. What's more, it's down 43% from peak levels two years ago in early 2021. It's even down 23% from pre-pandemic levels in early 2019.

This paints a much grimmer picture for the US Housing Market entering 2023. And highlights the reality that US Homebuyers, even with a sizeable decline in Mortgage Rates in recent months, are still completely priced out of the US Housing Market.

One way we know this is by comparing the cost of owning a home to how much income people earn. If ownership costs, driven by mortgage payments, property taxes, and insurance, increase by more than incomes, then buyers will drop out of the market because they can't afford a home (or can't qualify for the mortgage needed to buy the house).

Right now, buying in January 2023, the typical household in America would need to spend 42.8% of their gross monthly income on homeownership costs. That's an improvement from the 45% level in November. But it's still way higher than the 30.2% historical average.

The typical household in America would need to spend 43% of their income on homeonwership costs.
Housing Affordability is still near the worst levels of all-time in America (Source: US Census Bureau / Zillow / Reventure Consulting)

Today's House Payment / Income Ratio of 42.3% is still even higher than the previous peak that occurred during the last Housing Bubble in 2006. A reality that reinforces why homebuyer demand today is so much lower than it was in previous years.

Problem 2: It's Seasonal. Buyer Demand increases every January.

The other, more subtle reality, to the mid-January Buyer Demand surge is that it happens every single year around this time.

In each of the four previous January's, from 2019 to 2022, there was a similar sized surge in Mortgage Applications in mid-January (see below).

A surge that eventually subsided in 2-3 weeks.

For example, take a look at the one in January 2020, in the months before the pandemic. The purchase application index went from 250 to 314 in a matter of weeks, before dropping back down to its previous levels in February.

The implication here is that the "surge" in buyer demand over the last week is more likely related to seasonality than Mortgage Rates. Someone should tell CNBC that...

Of course - we won't know for sure if this short-term demand increase will be sustained until more data comes out in subsequent weeks. Stay tuned for updates. The MBA releases the purchase index every Wednesday.

To conclude, I want to ask you all a question:

What needs to happen in the Housing Market in 2023 to entice you to buy? How much do Mortgage Rates and Home Prices need to go down?

Given how bad affordability is right now, I suspect we'll need to see significant and sustained declines in both before buyers return. But I'm curious what you think. Make sure to leave a comment below.