Real Estate Trends: Increasing Interest Rates Continue To Drive Down Mortgage Demand (2024)

Key takeaways

• Mortgage demand for purchases is down 41% year-over-year, and refinance demand is down 84% year-over-year.
• Housing prices are higher than a year ago, and experts believe they will continue to climb overall, with some areas seeing price declines.
• 2023 is expected to be a poor year for housing, with the industry mounting a recovery in 2024.

As interest rates continue to climb higher and the threat of recession becomes more real by the day, housing demand has slowed.

As always, Q.ai is here to help. Here is what is currently happening in the housing market and the outlook for where demand, interest rates and housing prices are headed in 2023.

Current mortgage rates

The national average mortgage interest rate for a 30-year traditional mortgage is approximately 6.44% as of January 10, 2023. This is more than double the average mortgage interest rate of 3.22% at the beginning of 2022.

In spring 2022, the Federal Reserve began a series of interest rate hikes, which made it more expensive to borrow money across the board. Mortgages are about three basis points higher than the federal funds rate.

This is only a rough guide since a buyer's final interest rate depends on a few factors, including their down payment, credit score, debt-to-income ratio and location. However, even if borrowers have an ideal borrowing profile, they'll still pay a high interest rate compared to the early months of 2022.

A homebuyer with a 20% down payment for a $550,000 home and a 6.44% interest rate on a 30-year fixed mortgage will have a monthly payment of $2,764. At the beginning of 2022, the same loan with a rate of 3.22% would cost $1,908 a month, a difference of $874.

Mortgage applications are down

The increase in interest rates has put strong downward pressure on mortgage applications. The average mortgage contract interest rate decreased over the last two months of 2022, from 7.08% to 6.42% by year-end.

As a result of the decrease in rates, mortgage application volume saw a slight increase as buyers were eager to lock on a lower rate. However, this increase was short-lived as applications plummeted in the final two weeks of the year.

Year-over-year, mortgage applications are down close to 41%.

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While interest rates were also down for refinances over the same period, the rate of refinances did not increase. This is likely due to most homeowners refinancing earlier in 2022 when rates were much lower.

Also, for new homebuyers, it is believed that a refinance is only worth it if the interest rate on the new loan is at least 1% lower than the rate on the current loan. Since rates have not dropped by 1% from their highs, few people are looking to refinance.

Year-over-year, refinance applications are down more than 84%.

So far in 2023, mortgage rates have begun to head higher. This means that when mortgage application data is released, it will likely show a decline in volume.

Overall, experts feel that part of the slowdown is due to the time of year, as winter is traditionally the slowest time for home sales. They think mortgage applications will increase as the weather gets warmer and more people put their homes up for sale.

However, it's expected that the increase in applications will be minimal due to the rise in interest rates making homes more unaffordable for the average buyer.

Housing prices are still strong

Housing prices are staying high despite the increase in interest rates. Part of this is due to tight inventory, but it's also the result of seller expectations. Sellers are looking to maximize how much they get for their homes and aren't open to much negotiating.

In a normal market, the price of a home is set at a maximum value, and buyers negotiate a lower price. The rush for homes during the pandemic caused housing prices to spike, and buyers were making offers for well over the asking price.

This resulted in sellers getting their homes sold in a couple of days, receiving an excellent price for their house, and enjoying the financial benefits of the sale. However, interest rate hikes made it more difficult for buyers to afford the monthly payment, and employment uncertainty made it harder for buyers to justify the mortgage cost.

Sellers who don't want to give up their profits keep their home prices high and won't negotiate for a lower price unless they have to. This is causing homes to stay on the market for longer.

Housing outlook moving forward

Historically, housing prices tend to fall during a recession. However, while areas of the country will see price declines, the expectation of a substantial national price decrease is unlikely to be met.

This is primarily due to the lack of supply and higher inflation, adding to the cost of newly constructed homes. Any inventory increase is likely to result in homes staying on the market for longer as opposed to more new homes on the market, as many homebuilders have slashed production amid a weakening housing market and higher costs.

For potential homebuyers looking to buy after a significant price decline, most experts say that a 2008-style drop in housing prices in 2023 is unlikely. This is even as the Federal Reserve has indicated it's keeping the federal funds rate high until inflation markers show signs of easing.

The best outlook for the housing market is that inflation shows signs of cooling off by the summer, and the Federal Reserve can stop raising rates or begin to lower rates. In this scenario, mortgage rates would drop in the year's second half, spurring the housing market.

The worst outlook is that inflation remains higher for longer, and the Fed has to raise rates higher than the 5% range. In this scenario, housing demand will continue to decline as interest rates nearing double digits will make homes unaffordable for most would-be buyers.

Most experts believe the housing market will begin to recover in 2024 as inflation slows and the economy improves. This will give consumers the confidence needed to purchase a home.

The bottom line

Housing demand is slowing due to higher interest rates and the fear of recession. While most experts don't believe the housing market will crash, the slowdown in sales will impact home prices, causing them to increase more slowly.

For those interested in buying a home, it is wise to monitor current mortgage rates, other economic indicators and the Federal Reserve to see how much higher rates might climb. If there is a belief they will climb higher, locking in sooner rather than later could be a smart move.

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