As we transition into the spring housing market, the latest data on open contracts reveals a nuanced picture of housing demand. Currently, our weekly open contracts data displays positive growth year over year, albeit modest at just 1%. This slight increase comes on the heels of rising mortgage rates that are impacting demand growth, prompting us to examine the implications for the upcoming spring market.
Weekly Pending Sales
In assessing weekly pending contract data, Altos Research provides invaluable insight into real-time housing demand trends. The data demonstrates a steady positive trajectory in comparison to the previous years. The statistics for 2023 and beyond are still optimistic, portraying continued growth. However, the growth rate is tapering off, as we observe a mere 1% increase year over year.
It is essential to note that weekly pending contracts exhibit significant seasonal variations, particularly as we approach the close of the minimum sales cycle. With the traditional increase in demand expected, the concern lies in whether the upward trajectory can withstand the pressure of rising mortgage rates. Over the last two and a half years, housing demand has adapted to mortgage rates hovering around 6%, but as we step into the second week of January, rates have surpassed the 7% mark. This presents a critical juncture for continued demand strength, even while current data maintains a soft positive year-over-year trend.
To illustrate, the pending contracts for the past few years are as follows:
- 2025: 252,586
- 2024: 250,621
- 2023: 231,674
Purchase Application Data
Typically, the purchase offer data tends to see limited commentary in late December and early January, as trading volumes decline during this period, rendering the data less useful. However, in the weeks leading up to the holidays, the purchase application statistics exhibited solid performance despite the uptick in mortgage rates.
Last year’s data during the winter and early spring of 2024 indicated a fluctuating mortgage rate landscape, oscillating between 6.75% and 7.50%. The resulting pattern saw 14 negative prints, 2 flat prints, and only 2 positive prints. Monitoring this trend as mortgage rates approach their peak levels for 2024 will be crucial for gauging overall demand health.
10-Year Yield and Mortgage Interest Rate
As we project into 2025, it’s anticipated that mortgage interest rates will range from 7.25% at the higher end to 5.75% on the lower side, while the 10-year yield is expected to fluctuate from 4.70% to 3.80%. Last week marked a key data release concerning jobs, and despite rising 10-year yields, mortgage rates emerged slightly more favorable than anticipated for 2025.
It’s crucial to note that for sustained increases in mortgage rates from their current levels, economic indicators, particularly those related to the labor market, must demonstrate robust growth. However, the potential downside looms as housing permits and starts remain at recessionary levels. This combination of rising interest rates could spell trouble for construction-related employment, emphasizing the care needed in future forecasts.
Mortgage Spreads
The upward trajectory of mortgage rates poses challenges for the housing market; however, the situation could present even greater difficulties. If we were to factor in the worst-case scenario for mortgage spreads in 2023, rates could surge by an additional 0.82%, potentially surpassing 8%. In contrast, utilizing normal spread levels would imply that mortgage rates should be reduced by about 0.68% to 0.78% from current figures.
Looking forward, my forecast for 2025 anticipates a significant improvement in spreads, averaging between 0.27% to 0.41%, a notable shift from the average spread of 2.54% witnessed in 2024. Achieving this improvement in spreads serves as a guiding objective to bolster overall mortgage rate health moving forward.
Weekly Housing Inventory Data
As we step into early 2025, the levels of housing inventory signify a healthier market state compared to the low inventory challenges experienced between 2020 and 2023. This uptick in available inventory is one of the most significant positives for the market. Going forward, a key question lies in the timing of seasonal lows and the expected influx in spring stock. Preliminary indications suggest that we may see an inventory increase as early as January and February, rather than the traditionally observed March and April.
The trends in weekly inventory from January 3rd to January 10th reveal a decrease from 635,432 to 624,419 units, contrasted with an increase from 499,105 to 505,186 units during the same week of the previous year. The all-time low in inventory recorded was 240,497 units in 2022, while the peak reached 739,434 units in 2024, highlighting the volatility and fluctuations in the housing landscape.
New Listings
Looking towards 2025, expectations indicate a likelihood of increased new listing activity compared to the previous year. Despite working from historically low new listing figures during the holiday week, last week rebounded to a healthier state. My earlier prediction for 2024 anticipated peak seasonal listings at 80,000, which did not materialize. Normalcy would ideally see peak weeks in the range of 80,000 to 110,000 listings, and last week’s figures are as follows:
- 2025: 44,639
- 2024: 39,640
- 2023: 36,804
Price Reduction Rate
In a typical year, it is common to see price reductions on approximately one-third of homes, which reflects the expected cyclical nature of the housing market. Currently, the market is experiencing a phase of seasonal price reductions that will require ongoing monitoring as we advance into 2025. Recent data models the price reduction percentage over the past few years in the following manner:
- 2025: 33.9%
- 2024: 32%
- 2023: 36%
Looking Ahead: Inflation Week
As we approach Inflation Week once again, it is crucial to analyze the current perception of economic data, particularly as the 10-year Treasury yield is nearing cycle highs. Upcoming released data on retail sales and housing starts will likely generate interest, especially in conjunction with ongoing developments in mortgage rates. With rising rates prevalent, the builder confidence report will also be closely monitored.
Our attention will also remain fixed on the vital unemployment claims data scheduled for release on Thursday, as recent trends suggest a slight decline in claims. As the future unfolds, one must consider how the Federal Reserve will approach the rising yields—whether they aim to address them directly or allow the situation to stabilize independently.
Conclusion
The current housing market is characterized by a mix of positive indicators and looming concerns, particularly concerning rising mortgage rates. While year-over-year open contracts data reflects a slight increase in demand, other factors—such as fluctuating purchase application data, mortgage spreads, and evolving inventory states—suggest that potential challenges lie ahead. As we progress further into 2025, market participants will need to navigate the complexities of a shifting economic landscape while keeping a vigilant eye on critical data releases that could shape the trajectory of the housing market.
FAQs
What is the significance of the weekly pending contracts data?
The weekly pending contracts data is crucial as it reflects real-time trends in housing demand and can signal potential shifts in the market based on seasonal patterns and economic factors such as mortgage rates.
How do rising mortgage rates affect housing demand?
Rising mortgage rates can decrease housing demand, as higher rates mean higher borrowing costs for potential buyers, making purchasing homes less affordable.
What role do housing inventory levels play in the market?
Housing inventory levels impact the balance between supply and demand in the market. Higher inventory can lead to more choices for buyers, potentially stabilizing prices, while low inventory can create competition and drive prices up.
What trends are expected in new listings for 2025?
Based on the current outlook, an increase in new listings in 2025 is anticipated compared to previous years. However, these trends will depend on external factors such as economic performance and buyer sentiment.
How do price reductions affect buyers and sellers?
Price reductions can create opportunities for buyers to find homes at more affordable prices, while sellers may need to adjust their expectations for sale prices in response to changing market conditions.
