Mortgage Rates

Reality Check: Housing Market Remains Frozen Despite January Uptick

The housing market had a brief uptick in January, generating significant hype, but mortgage applications for purchasing homes have since dropped to their lowest level in 28 years. Homebuilders played a significant role in the January hype, focusing on the uptick in sales orders while ignoring the collapse in sales orders in Q4, which represented future revenues.

March 2, 2023
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The housing market showed a brief uptick in January, which generated significant hype and hoopla. However, this enthusiasm was short-lived as mortgage applications to purchase homes have since plummeted to their lowest level in 28 years. This trend is a leading indicator of home sales volume, and it suggests that the market is still frozen. Homebuilders played a significant role in the January hype by focusing on the uptick in sales orders in January while ignoring the collapse in sales orders in Q4, which represented future revenues. Overall, a healthy housing market needs sellers and brokers who are in touch with reality, set by potential buyers, and current market conditions, which include rising interest rates and inflation.

In January, there was a lot of talk about the housing market picking up, particularly because it marks the start of the spring selling season. However, this optimism was short-lived. Mortgage applications for home purchases steadily decreased since late January, reaching a 28-year low. This is a negative indicator for home sales, as mortgage applications are typically seen as a leading indicator. Compared to two years ago, the number of mortgage applications dropped by 48%, and it fell by 44% year-over-year.

Homebuilders contributed to the hype surrounding January by focusing on the brief uptick in sales orders after a 40%-60% decrease in Q4 2022. They largely derived their Q4 earnings from completing homes and closing sales from previous sales orders that were part of their backlog. Despite the collapse in sales orders, builders were keen to downplay this and instead focus on the rise in January sales orders. Analysts were quick to take the bait, and as a result, homebuilder stocks surged.

The National Association of Realtors added to the media buzz with their headline about an 8.1% increase in pending sales for January. However, this increase was compared to December, which was a particularly low month. In fact, compared to the previous year, pending sales were still down by 24%. Unfortunately, many people only read the headlines and were unaware of this.

While there was an increase in activity in January, including in stocks and bonds, this was short-lived. Bond prices rose, long-term yields fell, and mortgage rates dropped toward 6%, causing a brief uptick in home sales. However, all of this reversed in February. The average 30-year fixed mortgage rate is now almost 7%, and the 10-year Treasury yield is back at around 4%. The markets are gradually realizing that inflation is persistent, and interest rates will likely stay high for a while.

Overall, the housing market is still sluggish, as evidenced by the low number of mortgage applications. For sales volume to rise, home prices need to come down to be in line with 7% mortgages. Currently, there is a stalemate in the market, with many potential sellers clinging to aspirational prices, waiting for the return of sub-3% mortgages. However, a healthy housing market requires sellers and brokers to be in touch with reality and understand that potential buyers set the market's tone.


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