The industry is convinced that if only interest falls pent-up sidelined demand would be unleashed. But since mortgage rates started to fall in October from 8% to 6.85% today, mortgage applications have also fallen on an unadjusted basis except for one week. Today the Mortgage Bankers Association reported that the seasonally adjusted Purchase Index decreased 1% while the unadjusted Purchase Index decreased 4% compared with the previous week. Mortgage applications are 18% lower than last year and down to mid-1990 levels.
So why is demand falling when rates are falling?
• Prices are high: even if the rates have come down they aren’t low enough yet to make a dent in affordability. The largest pool of homebuyers is home sellers who sell and turn around and buy a new home. With 60% of mortgage account holders sitting on 4% of lower fixed rates, those homeowners are effectively trapped in their homes. They cannot sell and retain the same mortgage payments. Without sellers, the market will have low supply but also low demand.
• Savings: Even if rates come down homebuyers still have to come up with a downpayment and closing costs. In 2020-2021, the personal savings rate shot up to new records thanks to stimulus checks and forced savings from working from home. Today that savings rate has fallen to 2008 levels. It’s getting harder to save for that new home with inflation.
• Pulled in Demand: Contrary to the industry narrative, there was no supply issue in 2020-2021. Those were the best 2 years in total home sales since the GFC topping out at 6.1 million homes sold in 2021 (1M+ more homes sold than in any year between “08 and “19). Low rates, stimulus, forced saving, push to the suburbs and sunshine states, easy access to credit, and stock market meme stocks all helped to push demand up and unleash home sellers with large equity gains on the market. The pulled-in demand, especially in the luxury market is now dragging the market.
• Rate fallacy/Debt load: Lower interest rates are a reflection of low demand for borrowing. After years of ever-growing record borrowing, households’ appetite for debt is starting to wane. Households are now sitting on a new record of 19.7T in debt. Since 2020, households have added 3.1T in new debt. This is larger than the 2.5T household added between 2012 and 2019. Household debt has grown and now with higher rates the debt load is becoming burdensome. Debt service payments are rising as households pay college debt, credit cards, car loans, personal loans, and other debts. If it wasn’t for a large amount of refinancing of mortgages at ultra-low rates during the pandemic, US households would be drowning.
Rates are only one component.
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