Lower mortgage rates are slowing down inventory growth

Have lower mortgage rates already started to slow down housing inventory? I have a simple weekly growth model with the Altos inventory data: when rates are high, over 7.25%, inventory should grow between 11,000-17,000 weekly. This has happened six times this year and even though that would be an average inventory growth level with higher rates, it didn’t happen even once last year.

Now, with mortgage rates dropping below that 7.25% level recently, inventory hasn’t been able to hit that growth model once. Still, I would consider the last month of inventory growth healthy. We are getting closer to the seasonal decline of active inventory, which can play a part in the slowdown here. However, 2024 looks much healthier than 2023 data, as we desperately needed to get off those historically low levels of active listings.

Weekly housing inventory data

As we approach the traditional seasonal decline period for active inventory, we are working our way back to 2019 levels. Oddly enough, those levels were the five-decade low before 2020. So 2024 is a positive year for inventory growth, as higher rates did their job. This week, inventory grew by 5,721.

• Weekly inventory change (Aug. 9-August 16): Inventory grew from 692,752 to 698,473
• The same week last year (Aug.11-Aug 18): Inventory rose from 492,903 to 497,361
• The all-time inventory bottom was in 2022 at 240,497
• The yearly inventory peak for 2024 is this week at 698,473
• For some context, active listings for this week in 2015 were 1 212,129

New listings data

Another positive story has been the new listings data — a key variable explaining this year’s inventory growth. While I didn’t get my minimum target of 80,000 new listings during this year’s peak seasonal weeks, I am pleased we saw growth. I did get a bit excited two weeks ago with the pick-up of new listings as mortgage rates fell, but we didn’t get as good a follow-through this week. However, 2024 is still an improvement over 2023, which was the lowest new listing data ever recorded. 

Here are the number of new listings for last week over the previous several years: 

• 2024: 67,153
• 2023: 59,158
• 2022: 67,560

Price-cut percentage

In an average year, one-third of all homes take a price cut — this is standard housing activity. As mortgage rates rose earlier this year, leading to increased inventory, the price cut percentage grew higher than the last two years. We are getting closer to the point where the 2024 price cut percentage data will go lower than the levels we saw in 2022 every week. 

A few months ago, on the HousingWire Daily podcast, I discussed that the price-growth data would cool down in the year’s second half. Here are the price-cut percentages for last week over the previous few years:

• 2024: 39.4%
• 2023: 36%
• 2022: 39%

Weekly pending sales

Below is the Altos Research weekly pending contract data year-over-year to show real-time demand. We are only showing an pinch of growth year over year.

• 2024: 365,681
• 2023: 365,097
• 2022: 408,689

Purchase application data

Since mortgage rates have fallen more than 1% recently, we will draw a line in the sand at that point to track purchase application data going forward for the rest of the year. In the last 10 weeks, purchase application data has had six positives versus four negative prints. Remember that purchase apps look out 30-90 days before they traditionally hit the sales data, so that it won’t have an immediate impact. Still, it does explain how the recent NAR pending home sales data beat estimates to the positive side when people were looking for big negative data.

Since mortgage rates started to fall in November 2023, we’ve seen 18 positive prints, 17 negative prints and two flat prints in the week-to-week data. However, as mortgage rates began to rise earlier this year, we observed a decline in demand. 

10-year yield and mortgage rates

My 2024 forecast included

• A range for mortgage rates between 7.25%-5.75%
• The 10-year yield between 4.25%-3.21%

The 10-year yield reached as high as 4.70% this year as economic data beat estimates early on with hotter inflation data. However, mortgage rates didn’t follow the 10-year as closely as last year because the mortgage spreads improved in 2024.

Now, we are trying to break under that key 3.80% level on the 10-year yield, which has been difficult since the start of this year. We need more economic and labor data weakness to break lower and stay lower. So far, that hasn’t happened, and we have tested this level three times, so it will be hard to get mortgage rates below 6% without this level breaking. 

Mortgage spreads

Mortgage spreads were a negative storyline in 2023, as the collapse of Silicon Valley Bank and the resulting banking crisis pushed them to new cycle highs. We don’t have that variable this year and spreads have improved earlier than I thought, which has helped mortgage pricing. We have a lot of room to the downside on spreads, too. 

If we took the worst levels of the spreads from 2023 and incorporated those today, mortgage rates would be 0.50% higher right now. While we are far from being average with the spreads, the fact that we have seen this improvement is a plus this year.

The week ahead: Powell’s Jackson Hole talk

We have the big Jackson Hole event on Friday when Fed Chair Jerome Powell will give a speech. Powell is widely expected to lay the groundwork for the first Fed funds rate cut in September. We must remember that even if the Fed had cut rates three times already, they would still be in restrictive policy. We will hear more Fed president speeches this week and get data on existing and new home sales, as well as a few bond auctions and manufacturing data. In short, we have a lot of things this week that can move the bond market.