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Housing: Buyers 'waiting on the sidelines' as rising mortgage rates pressure rebound

After showing signs of a rebound in late 2022 and early 2023, one economist is calling signs a housing recovery has begun in earnest "premature."

"We are puzzled by claims among the commentariat that the housing market is starting to recover," Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a note to clients last week.

"That's a stretch, even allowing for a generous definition of recovery."

New data out Wednesday showed mortgage applications rose 7.4% from the week prior, according to data from the Mortgage Bankers Association's (MBA).

The move higher comes as mortgage rates are also now moving upward, with the average 30-year fixed mortgage jumping to 6.65% from 6.5% as of last week, according to Freddie Mac. This rise comes as investors brace for more rate hikes from the Federal Reserve this year than previously expected, pushing rates higher across the Treasury curve.


The small recovery in demand to purchase home still signals "many borrowers are waiting on the sidelines for rates to come back down," Joel Kan, MBA’s vice president and deputy chief economist, noted in the release.

Compared to the same week last year, mortgage applications are down 42%.

And with mortgage rates increasing over a half-point in February, the move has rippled into a "fresh blow" to mortgage demand. This same survey from the MBA out last week showed overall demand for home purchases hit a 28-year low.

Still, over the past month, a string of new housing data covering December and January has largely come in better than expected.

The MBA's real-time read on the housing market, however, suggests a cooling off is due in February.

Here's a roundup of where major housing data stands through the first month of 2023.

Home builder sentiment

The outlook from home builders has turned a corner. For the second consecutive month, confidence rose in February, signaling continued progress in the beaten-down housing market.

“Even as the Federal Reserve continues to tighten monetary policy conditions, forecasts indicate that the housing market has passed peak mortgage rates for this cycle,” NAHB Chief Economist Robert Dietz wrote in a press release.

"And while we expect ongoing volatility for mortgage rates and housing costs, the building market should be able to achieve stability in the coming months, followed by a rebound back to trend home construction levels later in 2023 and the beginning of 2024," Dietz added.

The latest survey showed an area of concern for builders remains construction for entry-level homes. Meanwhile, some home builders are still offering discounts to attract buyers into the market.

Housing starts

While optimism among builders remains strong in the new construction market, there continues to be a pullback on the pace of home construction. Housing starts fell 4.5% in the first month of the year to an annualized rate of 1.31 million homes, down 21.4% from January 2022 levels, the Commerce Department said February 16.

Housing starts for single family homes dipped 4.3% to 841,000 annualized rate, while multi-family housing starts came in at a pace of 457,000.

Permits to build rose 0.1% to a 1.34 million annualized rate, down 27% from the same month in 2022. And permits to build single-family units slid nearly 2% to 718,000 annualized rate, while multi-family permits reached 563,000 in January.

During this time, mortgage rates were trending lower, the economy added 517,000 jobs, and inflation remained sticky.

"The decline in permits in particular shows the diminishing amount of demand in the housing market, as fewer homes are slated to be built," Colin Johanson, research analyst at Barclays, wrote in a note following the release.

"We expect this to continue and for the market to cool off further, especially since house prices are still inflated from trend," he added.

Existing home sales

Existing home sales in January fell 0.7% to an annualized rate of 4 million, a 12th consecutive monthly decline and below the 4.1 million expected by economists, according to Bloomberg data. That's a 36.9% drop from the previous year.

The median sales price for an existing home jumped 1.3% to $359,000 compared to a year ago, according to the data from the National Association of Realtors released Feb. 21.

LOS ANGELES, CALIFORNIA - DECEMBER 19: A sign is posted in front of a home that is for sale on December 19, 2022 in Los Angeles, California. The National Association of Realtors will release its November data on existing home sales later this week after October saw existing home sales decline 28 percent from one year earlier. (Photo by Mario Tama/Getty Images)
A sign is posted in front of a home that is for sale on December 19, 2022 in Los Angeles, California. (Photo by Mario Tama/Getty Images) (Mario Tama via Getty Images)

"Home sales are bottoming out," said NAR Chief Economist Lawrence Yun. "Prices vary depending on a market’s affordability, with lower-priced regions witnessing modest growth and more expensive regions experiencing declines."

Total inventory for housing reached 980,000 units at the end ofJanuary, up 2.1% from December levels and 15.3% from one year ago.

New home sales

New single-family home sales rose 7.2% in January to an annualized pace of 670,000, up from December's rate of 625,000, according to a report from the Census Bureau released Feb. 24. This figure is 19% below January's pace of 831,000 in 2022.

The median sales price of a new home in January stood at $427,500, while the average sales price reached $474,400. At the end of the month, there were 439,000 new homes for sale in the market, representing about 8 months of supply at the current sales rate.

"The uptick in sales in January can partly be attributed to buyers who wanted to take advantage of the easing in mortgages rates at the time. This, in conjunction with a rise in buyer traffic through January, can help to explain this surprise rise," Johanson wrote.

"The level of sales today, despite surprising to the upside, for both our forecasts and the consensus, is only a movement back towards the pre-pandemic trend," he added.

Pending homes sales

The National Association of Realtors’ index of pending home sales climbed 8.1% to 82.5 in January, higher than the 1% increase expected from economists surveyed by Bloomberg, according to data released on Feb. 27. On a yearly basis, pending transactions plunged by nearly 24%.

"Buyers responded to better affordability from falling mortgage rates in December and January," the NAR Yun wrote in the press release.

Contract signings increased in each region of the country.

Case-Shiller home prices

The S&P CoreLogic Case-Shiller U.S. National Home Price index fell 0.8% in December compared to the previous month, according to data released on Feb. 28. On a yearly basis, the index climbed 5.8%, down from a 7.6% increase in the previous month.

On a seasonally-adjusted basis, prices fell 0.3% nationally in December.

Regionally, the leading price gains over the prior year in December were in Miami, Tampa, and Atlanta, with year-over-year increases of 15.9%, 13.9%, and 10.4%, respectively.

All 20 cities reported lower price increases in the year ending December 2022 compared to the year ending in November 2022.

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv

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