Key Points:

• Upwardly revised economic data, strong employment numbers, and the election have lowered bond market expectations for future rate cuts relative to the Fed’s projections, pushing up mortgage rates.
  
  
• Holding income constant, house-buying power decreased by more than $10,000 in October due to the 25-basis point increase in mortgage rates.
  
  
• While the lock-in effect has weakened since mortgage rates peaked in October 2023, progress stalled this October as prevailing rates rose again.

In March 2022, the Federal Reserve increased interest rates for the first time since 2018 in an effort to tame inflation. From summer 2020 until that point, the seasonally adjusted annualized pace of existing-home sales was consistently around 6 million or higher. However, higher inflation and inflation expectations sent bond yields, and therefore mortgage rates, soaring. The existing-home sales market is sensitive to higher interest rates and, as a result, sales fell and have since struggled to gain any momentum. The outlook for the existing-home sales market is dependent on several factors, but one of the primary drivers will be mortgage rates. 

“If lower mortgage rates materialize, they could help thaw the housing market, but the deep freeze for many rate-locked homeowners is likely to linger.”

What’s Going on With Mortgage Rates?

The popular 30-year, fixed mortgage rate is loosely benchmarked to the 10-year Treasury bond, which is often known as the risk-free benchmark for financial transactions worldwide. Shifts in global demand for U.S. Treasury bonds causes their price to go up and down and their yield to change with it. For example, the higher the current rate of inflation and the higher the expected future rate of inflation, the higher the yield that an investor would require to compensate for that anticipated increase in the future cost of money due to inflation. When the 10-year Treasury yield rises, mortgage rates follow suit and vice versa. 

Investor expectation of the Fed’s first rate cut in September quickly put downward pressure on mortgage rates, as investors bullishly, and perhaps prematurely, anticipated lower inflation and further rate cuts. Since then, upwardly revised economic data, including strong employment numbers, and the election have lowered bond market expectations for future rate cuts relative to the Fed’s current projections, pushing the 10-year Treasury yield up from its September low. This increase has, in turn, driven mortgage rates higher. 

Mortgage rates won't decline significantly through the end of the year and into 2025 unless the Fed throws us a curveball, such as cutting rates even more than expected. But, assuming the economy continues to show signs of normalization and inflation continues to moderate, rates will likely modestly ease through 2025, as the Fed continues with its rate-cutting cycle.

Mortgage Rate Re-Acceleration Stymies the Housing Market

In the shorter run, higher mortgage rates have a dual impact on the housing market – reducing affordability, all else held equal, for potential buyers and strengthening the rate lock-in effect for potential sellers. Holding income constant, house-buying power decreased by more than $10,000 in October due to the 25-basis point increase in mortgage rates. Meanwhile, homeowners that locked into historically low mortgage rates in 2020 and 2021 were further rate locked in. We can estimate the strength of this rate lock-in effect using the difference between the prevailing market mortgage rate and the average rate for all outstanding mortgages. As the prevailing market mortgage rate rises further above the average rate for all outstanding mortgages, the greater the number of existing homeowners that are rate-locked in. 

While the lock-in effect has weakened since mortgage rates peaked in October 2023, progress stalled in October as prevailing rates marched higher. The lock-in effect will continue to limit market potential until rates either decline sufficiently to unlock a substantial number of homeowners or remain elevated long enough that a significant portion of borrowers lock into these higher rates.  

What’s the Outlook?

For housing, a ‘soft-landing’ means the economy remains strong, while mortgage rates gradually fall. Slightly lower rates in 2025 will boost affordability, ease the rate lock-in effect for sellers, and thereby unlock some existing-home inventory. Increased house-buying power, combined with more inventory, will boost the pace of existing-home sales from current cycle lows, but sales activity will remain constrained by the rate lock-in effect, keeping sellers, who would likely also be buyers, on the sidelines. If lower mortgage rates materialize, they could help thaw the housing market, but the deep freeze for many rate-locked homeowners is likely to linger. 

October 2024 Existing-Home Sales Outlook Highlights

For the month of October, First American updated its Existing-Home Sales Outlook Report to show that:

• Existing-home sales for October are expected to increase 0.4 percent from September’s pace of sales and decrease 3.7 percent compared with the predicted pace of sales a year ago.
  
  
• The largest contributors to the projected monthly increase in existing-home sales are an easing of the rate lock-in effect as measured by the lagged* spread between the prevailing market mortgage rate and the average rate for all outstanding mortgages (+0.69 percentage points), positive economic growth (+0.3 percentage points), and an easing of credit conditions (+0.07 percentage points).

*The spread is incorporated with a three-month lag in the Existing-Home Sales Outlook model.

Methodology

Our Existing-Home Sales Outlook Report ‘nowcasts’ existing-home sales, which include single-family homes, townhomes, condominiums, and co-ops on a seasonally adjusted annualized rate based on the historical relationship between existing-home sales, U.S. demographic trends, house-buying power, and the prevailing financial and economic conditions, as well as momentum, a weight assigned to past values. Please note that the Existing-Home Sales Outlook Report is based on assumptions about demographic, economic and financial conditions. Actual values may differ from those projected. Recent existing-home sales estimates are subject to revision to reflect the most up-to-date information available on the economy, housing market and financial conditions.