Home Buyers Are Coming Back. Sales Could Be Near Their Worst.

Catalysts to help sales break out of their free fall this autumn have been few and far between. The median sale price measured by
Redfin
reached $413,874 in October, an increase of 3.5% from one year prior, while the supply of homes for sale remained lower than the same month last year. High prices and low supply are likely among the reasons consumers polled by Fannie Mae were historically pessimistic about home buying in October.

But one critical change has developed since then: investors are betting that the Federal Reserve will cut rates earlier than previously expected, which in recent weeks has put downward pressure on the 10-year Treasury yield. That, in turn, has helped drive down mortgage rates by more than a quarter of a percentage point, according to Freddie Mac’s weekly readings. The average 30-year fixed-rate mortgage last week was 7.44%, its lowest level since September.

Such a decline isn’t likely to move the needle for buyers on a large scale—particularly when it comes to coaxing homeowners with mortgage rates below 4% back into the market—but it has made a difference in mortgage application volume. After falling to the lowest level since the mid-1990s, the weekly volume of home purchase loan applications has gained a seasonally-adjusted 3% for two weeks straight, according to the Mortgage Bankers Association.

It will take time to see how—and if—the pickup in mortgage applications results in more closed home sales. An application for a loan doesn’t necessarily lead to a contract signing—and contract signings have been falling through. Deals measured by Redfin in October were canceled at the highest rate since Redfin began collecting the data in 2017. 

But perhaps of more importance than a 0.35 percentage point drop in mortgage rates is the expectation by economists that further mortgage rate declines are in store—and, with that, more home sales. “I believe we’ve already reached the peak in terms of interest rates,” National Association of Realtors Chief Economist Lawrence Yun said recently. He expects rates to fall to a range between 6% and 7% in the spring. 

The trade group in October forecast that home sales will trough in the fourth quarter as mortgage rates peak, and pick up in the new year as mortgage rates slide as low as 6.3% by the end of 2024. It isn’t alone: the Mortgage Bankers Association and
Fannie Mae
similarly foresee home sales increasing in 2024 as mortgage rates trend down.

Of course, it’s a long road to spring, and hotter-than-expected economic data or hawkish rhetoric from the Federal Reserve could turn the trend around. A positive view of inflation has helped mortgage rates sink, but anything that causes market participants to re-evaluate their expectations for rate cuts in 2024 could send the 10-year Treasury yield—and mortgage rates—back up.

Write to Shaina Mishkin at [email protected]