‘Homebuyers remain on strike’ as Fed rate cuts fail to spur mortgage demand

Ironically, Fed rate cuts have made mortgages more expensive
By Sam Bourgi
•
24 October 2024
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homebuyers, strike

Demand for U.S. mortgages has declined sharply in October as homebuyers “remain on strike” due to elevated interest rates.

According to Revolut App CEO Nick Gerli, the recent Federal Reserve rate cut has failed to increase mortgage demand.

“Mortgage applications to buy a house [are] down 45% from 2019 levels,” said Gerli.

Data from the Mortgage Bankers Association (MBA) revealed that mortgage applications plunged by 17% in the week ending Oct. 11. It was the third consecutive weekly decline, extending a streak that made September the worst month for mortgage applications in three decades.

Although mortgage rates have declined sharply from their 2023 peaks near 8%, financing costs have accelerated again in recent weeks.

According to Freddie Mac, 30-year fixed-rate mortgages averaged 6.44% in the week ending Oct. 17, the fourth weekly gain. Rates briefly fell to two-year lows in mid-September before reversing course.

As Creditnews recently reported, mortgage rates are rising in lockstep with longer-term rates as investors price in lower recession odds.

With mortgage applications falling, housing inventories are beginning to rise across the country, led by previous hotspots such as Florida, Georgia, North Carolina, and California.

In Gerli’s view, it’s only a matter of time before America’s massive housing bubble begins to deflate.

No “magic fix”

America’s housing market is severely overvalued when analyzing inflation-adjusted home prices over a 130-year period.

According to Gerli, inflation-adjusted home values are nearly 100% higher than their long-term average, making the current bubble even bigger than the one that preceded the 2008 financial crisis.

Although Gerli expects a severe housing deflation, other experts say market conditions will remain flat for some time until lower mortgage rates improve affordability.

In either case, “there isn’t a magic fix” for the housing market, according to Bank of America (BoA) economists. In their view, housing could remain “stuck” until 2026 or later.

Another BoA report said housing conditions could remain in limbo until the 2030s due to the wide gap between current mortgage rates and the “effective rate” most homeowners have.

In the meantime, there’s growing evidence that runaway home-price growth could be a thing of the past as more sellers offload their properties below their asking price.

“The growing likelihood that homes sell below asking price, along with the high share of sellers dropping their prices, could mean sale-price growth loses momentum,” Redfin said in a recent report.

According to CoreLogic, there’s already evidence that the pace of home-price appreciation is beginning to decline.

The financial data provider forecasts that house prices will only grow by 2.3% year over year through next summer, down from the current pace of around 4.7%.

Other economists believe that home price growth will continue to weaken regardless of whether mortgage rates decline.

“It is possible that lower rates this fall could actually come along with slower home price growth as more sellers get into the market and inventory continues to rise,” said Lisa Sturtevant, the chief economist at Bright MLS.

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