This morning, home builders and mortgage brokers awoke to some positive news: There's a chance that U.S. housing market demand, which was in free-fall mode during the second half of 2022, has bounced off the bottom.
The seasonally adjusted Mortgage Purchase Application Index—a key leading indicator for housing activity that tracks mortgage applications—rose to 198.7. That's the highest weekly reading since September, and up 24.7% from last week's reading of 159.4.
The good news for brokers and builders? This uptick in purchase applications could mean housing demand is on the mend after getting crushed by rising mortgage rates last year. The bad news? The Mortgage Purchase Application Index—which just a week earlier hit its lowest point since Jan. 2015—is still down 35.4% on a year-over-year basis.
"Mortgage application activity rebounded strongly in the first full week of January, with both refinance and purchase activity increasing by double-digit percentages compared to last week, which included the New Year’s holiday observance,” wrote Mike Fratantoni, chief economist at Mortgage Bankers Association, in the firm's statement about the latest purchase application numbers. “Despite these gains, refinance activity remains more than 80% below last year’s pace and purchase volume remains 35% below year-ago levels.”
View this interactive chart on Fortune.com
The reason housing market activity went into free-fall mode in the second half of 2022 is simple: Housing affordability reached "pressurized" levels—meaning it's currently among the most expensive times in history to purchase a home. That'll happen when mortgage rates spike from 3% to 7% right after the Pandemic Housing Boom sent U.S. home prices up 41%.
On the flip side, the reason housing market activity could be on the mend is because affordability has "depressurized" a bit lately. Over the past two months, the average 30-year fixed mortgage rate has slipped from 7.37% to 6.04%. Meanwhile falling U.S. home prices (down 2.4% between June and October) and rising incomes also helped to "depressurize" the market.
But let's be clear: Even if housing demand has bottomed, it doesn't guarantee that national home prices have too. Indeed, among the nation's 27 leading real estate forecasters, 23 expect U.S. home prices to slip further in 2023.
"Housing demand [home sales] is close to a trough; housing supply [housing starts and completions] has yet to hit bottom; and [U.S.] house prices have a way to go before reaching their nadir," Moody's Analytics chief economist Mark Zandi recently told Fortune. The reason? Housing affordability, Zandi says, remains out of balance.
In September, Fed Chair Jerome Powell had a clear message: “This difficult [housing] correction should put the housing market into better balance.” As we head into the spring season, brokers and builders alike continue to grapple with the housing correction that was set off by spiked mortgage rates. The question remains: Where do mortgage rates head as inflation eases? And in which regional housing markets will prices remain resilient, and which markets will continue to correct?
Want to stay updated on the housing correction? Follow me on Twitter at @NewsLambert.
