Rates drop, but damage to housing’s fall season ‘already done’

This week marked a slight decline in 30-year mortgage rates, which dropped to 7.32%, the first decrease in two months. Despite this reduction, many potential homebuyers still feel priced out of the market.

According to data from Freddie Mac, the average rate for a 30-year fixed mortgage fell from 7.4% the previous week, representing the first weekly decline since August and the most significant drop since July. As Treasury yields dipped below 5%, analysts suggest that mortgage rates may continue to decrease in the coming days. Mortgage News Daily also reported the 30-year rate at 7.32% on October 22, indicating it is among the lowest readings seen in recent weeks.

However, the decline in mortgage rates does not necessarily signal a positive trend for the broader economy. Investors seem to be gravitating towards bonds as a safer option due to rising concerns over artificial intelligence and escalating oil prices amid the ongoing conflict in the U.S.-Iran region.

Looking ahead, investors largely anticipate that the Federal Reserve will maintain current short-term interest rates during its upcoming meeting on October 27-28. The CME Group's FedWatch tool points to a 95% likelihood of a rate hold following a 25-basis-point increase in September. Nevertheless, there is nearly a 75% chance of a potential rate hike during the Fed’s December meeting.

Despite the recent decline in mortgage rates, experts suggest that the damage to the fall housing market has already taken its toll. Anthony Smith, a Senior Economist at Realtor.com, stated, "The damage to the fall housing market is already done," referring to the significant drop in pending sales last month. He noted that while buyers may have gained some leverage in negotiations due to the slowing sales pace, this advantage has come at a cost of affordability.

The slowdown in the housing market is evident, with overall mortgage applications falling by 5.3% for the week ending October 16, according to the Mortgage Bankers Association (MBA). Year-over-year, the purchase index has decreased by 18%, and refinance applications have plummeted by 59% during the same period. Joel Kan, the MBA's Vice President and Deputy Chief Economist, remarked, "It is very clear that the higher mortgage rate environment has cooled the housing market this fall."

Potential sellers appear to be responding to these trends, as new listings decreased by 1.4% week-over-week and 2.7% year-over-year, as reported by Redfin on October 22. Inventory levels are growing slowly, with total inventory increasing by 0.1% week-over-week and up 2.1% from a year ago, as homes linger on the market.

Data from various sources indicates that home price growth is either stagnant or slightly declining compared to last year. For instance, ATTOM's Q3 U.S. Home Affordability Report reveals a 2% year-over-year drop, while Redfin and Zillow report modest increases of 0.2% and 1.2%, respectively. Mike Simonsen, Chief Economist at Compass, noted that pending sale prices are 1.2% lower than last year, though closed sale prices have remained relatively stable despite high mortgage rates. "Home sellers have, in the last four years, chosen to sell fewer homes to match the lower quantity demanded," Simonsen explained, adding that many homeowners are reluctant to sell at a loss if they can avoid it.

Additionally, buyers who previously secured ultra-low mortgage rates during the pandemic are also hesitant to sell. A report from Realtor.com dated October 22 estimates that 65.6% of all mortgages had rates of 5% or lower in the second quarter, down slightly from 66.7% in the previous quarter. Although the mortgage rate lock-in effect is gradually easing, progress remains slow due to the current high-rate environment, making it difficult for many to justify moving. Nonetheless, Hannah Jones, Senior Economist at Realtor.com, noted that homebuying activity typically persists around significant life events such as having children, job changes, or divorces, which helps maintain some market momentum.