Housing Demand Climbs Amid Rising Mortgage Rates, Are We Facing a Market Turning Point?

Housing demand continues to expand despite mortgage rates reaching a critical inflection point. Recent data indicate ongoing growth in homebuying activity, reflecting resilience amid rising borrowing costs.

Weekly pending home sales have posted five consecutive weeks of gains, although these figures can be influenced by holidays and short-term volatility. Last week’s pending sales reached 71,230—the highest compared to 68,726 the prior year—signaling sustained buyer interest despite mortgage rates nearing a yearly high.

Mortgage purchase application data provides a forward-looking indication of future home sales by approximately one to three months. Year-over-year growth in purchase applications has held steady at 12%, while week-over-week growth was 1%, demonstrating continued demand momentum. However, weekly growth has cooled recently, signaling potential softness if rates keep climbing.

The mortgage rate environment is pivotal to the housing market’s trajectory. The forecast for this year anticipated mortgage rates fluctuating between 5.75% and 6.75%. Recently, rates hovered near the upper bound due to fluctuations in the 10-year U.S. Treasury yield, which has climbed over 4.3%—levels not seen since late last year. This increase is partly driven by geopolitical tensions that have elevated economic uncertainty.

Mortgage spreads, the difference between mortgage rates and the 10-year yield, remain near normal levels and help stabilize mortgage rate volatility. Although spreads slightly widened amid bond market disruptions, they currently prevent rates from surpassing the 7% threshold seen in previous years. Analyses show that if mortgage spreads were at their worst levels from recent years, today’s mortgage rates would be significantly higher than the current 6.53%.

Inventory trends also influence market dynamics. Housing inventory has begun its typical seasonal increase but at a much slower pace than last year. Year-over-year inventory growth has decelerated from peaks of 33% to about 6.35%, suggesting a tightening supply environment relative to recent periods. New listings, while still below seasonal expectations and showing slight year-over-year declines, have started to rise modestly, offering some relief to buyer options.

Price adjustments remain a key indicator of market balancing. Approximately one-third of homes receive price reductions before sale, a figure that rises in conjunction with increasing mortgage rates and inventories. The percentage of homes experiencing price cuts currently stands below last year’s levels, indicating pricing pressure is moderate but could intensify if rates hold higher for longer.

Several factors will shape housing market conditions in the near term:

1. Geopolitical events
2. The trajectory of mortgage rates influenced by Treasury yields
3. Ongoing changes in housing inventory and new listings
4. Mortgage spreads impact on overall borrowing costs

Market watchers emphasize that if geopolitical tensions escalate, bond yields could rise further, prompting additional mortgage rate increases and dampening affordability. This scenario complicates housing affordability but does not yet appear to have curbed the fundamental demand for homes.

In summary, housing demand remains resilient amid a challenging rate environment. Pending sales and purchase applications reflect ongoing buyer interest even as mortgage rates test higher thresholds. Supply growth is subdued but beginning its seasonal climb, while mortgage spreads provide some relief against explosive rate spikes. The evolving economic landscape, particularly geopolitical uncertainty, will be critical to watch for its impact on rates and housing market stability throughout the year.