The housing market was crazy again last week. Mortgage rates fell as the banking crisis got worse and purchase application data grew for the second week in a row, but the big question is: Did we hit the seasonal bottom in housing inventory?

Here’s a quick rundown of the last week:

• The 10-year yield had a roller-coaster week, and so did mortgage rates, but the 10-year yield held its critical line, and mortgage rates ended at 6.55%.
• Weekly inventory increased by 1,734. New listing data collapsed, but we are putting an asterisk on that data line for this week.
• Purchase application data rose 7% weekly, still down 38% year over year.

10-year yield and mortgage rates

A national banking crisis while the Federal Reserve raises rates and reduces its balance sheet sounds like a lousy cocktail for economics, but that is precisely what we are dealing with today. As I write this article, I see news that even Warren Buffet has been asked to chime in on how to deal with this crisis.

So, we can now add a new variable into the equation for 2023: What does a banking crisis mean for mortgage rates?

In my 2023 forecast, I said that if the economy stays firm, the 10-year yield range should be between 3.21% and 4.25%, equating to mortgage rates of 5.75% to 7.25%. If the economy gets weaker and we see a rise in jobless claims, the 10-year yield should go as low as 2.73%, translating to 5.25% mortgage rates. This assumes the spreads are wide as the mortgage-back securities market is still very stressed.

The economic data was OK last week. If we didn’t have the banking crisis, we would probably just focus on how firm the economic data was last week. GDP growth was estimated at 3.2%, jobless claims fell last week, housing starts beat estimates and purchase application data showed some growth. Retail sales were slightly below estimates, but we had positive revisions, and industrial production was unchanged.

Last week’s 10-year yield took us to the critical line in the sand.


Last week the  two-year yield collapsed from a 5% level to under 4%. This bond market is screaming at the Fed to cut rates. However, many Wall Street firms were betting on higher rates and got burned by the banking crisis. So, the market is wild and the Fed might not care what short-term rates are doing now. 

Mortgage rates fell and ended the week at 6.55%, however, we see a lot of stress in the financial markets. Many people wondered why mortgage rates weren’t lower on Friday; the answer is that the banking crisis has stressed the mortgage-backed securities market more than when bond yields fell to these levels last time.

So this is going to be an epic week because we have incorporated a new variable into 2023 that wasn’t in the equation at the start of the year and the Fed meets on Tuesday and Wednesday.

I want to see how the 10-year yield acts this week. Can we get follow-through bond buying, which would take a direct shot at the low-level range of 3.21%? That would be a big deal to me because it’s happening with the labor market still doing OK.

We don’t know what news can happen at any second to change the landscape of the economic discussion until the financial markets calm down.



With the potential of news getting worse in the short term, we need to be mindful that we can see some crazy market pricing in mortgage rates and moves in the 10-year yield. So, every day counts now during a banking crisis, as the world markets are trying to restore some order.

Weekly housing inventory

Looking at the Altos Research data from last week, the big question is whether we are finally starting to see the seasonal increase in spring inventory. On this front we have some good news and some bad news.

First, we saw a slightly increased number of active listings, which made me jump for joy! Last March is when we saw the seasonal bottom before inventory took off, so I am hoping we get the same growth in the data this week, making it back-to-back years that we bottomed out in March. Although that’s not normal, it’s better than what we saw in 2021 when we didn’t hit bottom until April.

• Weekly inventory change (March 10-March 17): Rose from 412,535 to 414,278
• Same week last year (March 11-18th): Fell from 247,320 to 245,776
• The bottom for 2022 was 240,194

The seasonal increase in inventory means more sellers can also be buyers of homes and fewer bidding wars in certain parts of the country.

Now the bad news: new listing data fell so much this week that I am putting an asterisk on this week’s data until we see if this is a trend or just a one-off in the weekly data that can occur from time to time.

Also, we are creating a bigger gap in the year-over-year data. Earlier in the year, we were on par or even slightly higher some weeks than the previous two years. Now we are creating a bigger gap, as you can see below:

• 2021 60,904
• 2022 55,348
• 2023 42,407

For some historical reference, these were the weekly inventory data in previous years:

• 2015   80,909
• 2016   84,647
• 2017   78,237

Now, this new listing number can be one week of data that just reverts to the trend, which would be higher than this level. Or, like last year at the end of June, when rates spiked higher, we saw a noticeable decline in new listings, since households didn’t want to list their homes with rates rising.

This is something that I have talked about before — some homeowners just don’t want to buy homes with mortgage rates of 7% plus and decide to call it to quits. This is a problem when mortgage rates move higher too quickly, and it gets harder to make that big life-long decision when the cost of housing matters.

Let’s wait two more weeks and see if this new listing trend continues or just reverts higher. I am hoping it’s just a one-week event.

Purchase application data

Last week we got better news with another 7% week-to-week gain on purchase apps, and the year-over-year decline also fell. However, as I always stress, the bar is low here, so it doesn’t take much to move the needle on application data when mortgage rates move lower.



When rates spiked from 5.99% to 7.10%, that gave us one month’s negative data week to week, but the last two weeks have been positive. We have had more positive purchase application data than negative since Nov. 9. Since this data looks out 30-90 days, this week’s existing home sales report should see a bounce.

We need to be mindful of the data coming out later in the year with the one-month decline in this index. However, you don’t need to be a rocket scientist or have a Ph.D. in economics here to realize the housing market is moving with where the 10-year yield is going, even with mortgage spreads wide. So with all the drama we have today, let’s see if mortgage rates fall further this week or whether the line in the sand holds.

The week ahead

This week we have existing home sales and new home sales reports coming out, but to be dead honest, economic data doesn’t matter until we get control of this banking crisis situation. While writing this article, news broke that UBS is buying Credit Suisse with government support and Flagstar will buy Signature Bank assets. In addition, the Fed announced a
coordinated central bank action to enhance the provision of U.S. dollar liquidity.

In times like this, market drama needs to calm down first before we can focus on the economic data. The Federal Reserve will meet this week on Tuesday and Wednesday, and the Q&A portion of this meeting will be epic.

Remember that back in November Fed Chair Powell said, “I don’t have any sense we have overtightened or moved too fast.” Now, after all the emergency banking lending programs and global coordination to keep the banking system working, does he still believe this statement? I am hoping someone asks him this direct question. 

Listening to what the Fed says this week is critical. We can focus directly on the housing data, but the noise this week will determine whether the market believes this banking crisis is under control or it’s burning out of control, forcing the Fed and the government here and around the world to do more to calm the markets down.

After pulling back at the start of the year, homebuilders jumped back in during February as homebuyer demand and builder confidence trended upward.

Homes were started at an estimated annual pace of 1.45 million in February, up 9.8% month over month, according to a report released Thursday by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development (HUD).

Despite the month-over-month increase, housing starts were still down 18.4% year over year thanks to the annual pace of single-family housing starts dropping to 830,000, a decline of 31.6% year over year.

“The pace of new construction had been picking up over the past two years. In 2022, a total of 1.55 million new housing units were started, which is a little higher than the average annual new starts over the past five decades,” Lisa Sturtevant, the chief economist at Bright MLS, said in a statement. “However, the amount of new housing being built is still far below what is needed to meet demand and help moderate high prices.”

Unlike last month, multi-family housing starts were up both month over month and year over year, rising 24.1% and 14.3%, respectively, to a pace of 608,000.

As the pace of housing starts rose in February, so did the pace of completions, which were up 12.2% month over month and 12.8% year over year to a pace of 1.557 million. Although the pace of single-family completions was up 1.0% from a month ago, the pace of 1.037 million is still down 3.6% compared to a year ago. The pace of multi-family completions (509,000), on the other hand, posted massive increases both month over month and year over year, at 44.6% and 72.0%, respectively.

“Completions have outpaced starts since July 2022 and that will likely continue to put downward pressure on the number of single-family homes under construction. Builders may focus on completing existing projects, rather than starting new ones,” Odeta Kushi, First American’s deputy chief economist, said in a statement. “As the inventory of new, completed homes rises, it will provide some much-needed relief to a supply-starved market and put downward pressure on new-home prices.”

Although homebuilder sentiment in sales expectations for the next six months did drop slightly in the most recent  National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) report, building permits are starting to trend upward, at least on a monthly basis. In February, building permits were issued at an estimated annual pace of 1.524 million, up 13.4% from a month prior, however this is still down 17.9% year over year.

“Single-family housing permits, a leading indicator of future starts, also increased 7.6% compared with the previous month,” Kushi said. “The uptick in single-family housing permits and starts aligns with the recent increase in homebuilder sentiment.”

Despite this uptick, experts are still just cautiously optimistic thanks to the volatile mortgage rate environment and financial system stress.

“If interest rates come down, homebuilders could find it easier to finance new projects. But there are other challenges,” Sturtevant said. “Banks, and particularly regional banks, have been under pressure after the recent collapse of Silicon Valley Bank and Signature Bank. Homebuilders often depend on financing from these regional banks. Instability or other disruptions in the banking industry could reduce building activity this spring just as homebuilders want to be ramping up.”

Regionally, housing starts were up month over month in the South (2.2%), the Midwest (70.3%) and the West (16.8%) but were down 16.5% in the Northeast. On a yearly basis, homebuilders’ housing starts were down in all regions, with the Northeast posting the largest annual decline at 20.9%.

The increase in housing starts is reflected in the homebuilder outlook recorded in the BTIG/HomeSphere State of the Industry Report.

According to the survey, 51% of builders saw a yearly decrease in sales last month, down from 54% in January. Despite a 51% yearly decrease in orders, builders again reported a slight improvement in performance relative to expectations, with 27% of respondents reporting that sales were better than expected, and 21% reporting that sales were worse than expected. These metrics improved from 21% and 38%, respectively, in January.

The BTIG/HomeSphere study is an electronic survey of approximately 50-100 small- to mid-sized homebuilders that sell, on average, 50-100 homes per year throughout the nation. In February, the survey had 98 respondents.

While sales are improving, builders are still using incentives to generate traffic, however 27% of builders reported that they raised some, most, or all base prices in February. In addition, 23% of builders reported increasing some, most or all incentives, down from 30% a month ago.

“Although still sluggish, business conditions are showing some clear signs of improvement as we begin the spring selling season,” Carl Reichardt, a BTIG analyst, said in a statement.

After 12 months of declines, existing home sales rebounded in February, climbing 14.5% month over month to a seasonally adjusted annual rate of 4.58 million homes, according to a report from the National Association of Realtors (NAR) released Tuesday.

February’s month-over-month increase is the largest monthly percentage increase recorded since the 22.4% monthly gain reported in July 2020. However, existing home sales were still down 22.6% in February on a yearly basis.

“Conscious of changing mortgage rates, home buyers are taking advantage of any rate declines,” Lawrence Yun, NAR’s chief economist, said in a statement. “Moreover, we’re seeing stronger sales gains in areas where home prices are decreasing and the local economies are adding jobs.”

In January and early February, mortgage rates fell from the mid-6% range to the low 6% and even high 5% range, incentivizing homebuyers who were sitting on the fence to buy now.

In addition to lower mortgage rates, homebuyers who closed sales on existing homes in February also saw a slight decrease in the median sales price, which fell to $363,000, a decrease of 0.2% year over year. This decrease ends a streak of 131 consecutive months of yearly price increases. It is the longest streak on record.

“Home prices fell in February, the first year-over-year decline in the national median home price in more than two decades,” Lisa Sturtevant, Bright MLS’ chief economist, said in a statement. “Higher mortgage rates have eroded buyers’ purchasing power and prices have taken a hit. But the drop in price is modest, and a lack of supply continues to prop up prices in many housing markets”

Although the sales pace increased in February, the number of days a home typically spends on the market ticked up slightly to 34 days, up from 33 days in January and up 18% compared to a year ago. Overall, 57% of homes sold in February were on the market for less than a month.

While the uptick in sales pace is certainly good news for the real estate industry, it is not as great for the continuous issues with low inventory. The number of existing homes on the market remained unchanged from January at 980,000, which represents 2.6 months of supply at the current sales pace. But despite the low level of inventory, the number of existing homes on the market is still up 15.3% compared to a year ago.

“Inventory levels are still at historic lows,” Yun added. “Consequently, multiple offers are returning on a good number of properties.”

Regionally, existing home sales rose month over month in all four regions, with the West recording the largest monthly increase at 19.4% to a sales pace of 860,000 homes. The South (annual rate of 2.11 million) posted the second highest monthly increase at 15.9%, followed by the Midwest (annual rate of 1.09 million) at 13.5% and the Northeast (annual rate of 520,000) at 4.0%.

Despite posting the largest month-over-month jump, the West still posted the highest yearly decline in sales rate, falling 28.3% from February 2022.

We might only be a few weeks into 2023, but these first weeks have been rich with informative data. We’re already starting to see signals for what the market will look like this spring and beyond.

Mortgage Rates

In January, rates were hovering in the 6% range. Inflation and CPI have been leading to lower overall interest rates — specifically mortgage rates. Last fall, when mortgage rates first jumped over 7% we could see dramatic and immediate slowdown in buyer demand. Throughout January, as rates have drifted down closer to 6%, buyer activity has picked up quickly. 

Our data shows that mortgage rates are going to be key this year. If economic conditions cause rates to jump over 7%, expect buyers to sit on the sidelines, allowing active inventory to build and time to sell a home to climb. On the other hand, if rates slide under 6%, we can already see that buyers are eager.

If you are working with first-time homebuyers or low-income borrowers, remind them of the abundance of programs available that reduce rates or support smaller down payments. Programs like these are great opportunities for first-time buyers to break into the market, even when mortgage rates are higher. 

Inventory

In late January, there were 465,000 single family homes on the market, all across the country. That is 36% fewer properties for sale than the numbers we had prior to the pandemic, but still much higher than the inventory we had in early 2022.

We’re not seeing any indication that there will be a surge of new inventory anytime soon. Home sellers are listing very few homes right now, probably because they have very cheap mortgages, and any new home they move into will have significantly higher payments. As a result, inventory declined with few new listings and a surprising number of buyers. In 2023, inventory will likely be back to following the traditional, seasonal pattern that we were all used to prior to the pandemic, though the market will still have tighter supply than in those days.

Unlike the patterns we saw during the COVID-19 pandemic when homes were listed for sale and sold almost immediately, most homes listed for sale today will remain on the market for at least a few weeks. We can see evidence of multiple offers on homes in January, but these are coming in at around the asking price, rather than the over-bidding wars we saw during the pandemic.

I expect inventory to start climbing in earnest in February, peaking for the year in the late summer and ending 2023 with fewer than 700,000 homes on the market. Even though the patterns are more normal, inventory is still tight and will remain more restricted than some buyers might be hoping for. 

Pricing

In late January, the median price of single family homes in the U.S. was $414,900. This is slightly higher than the median from this point in 2022. But the pricing trend we are most interested in right now is the median price of new listings each week. 

The median price of new listings is currently $379,900. In 2022, the new listing price was skyrocketing each week as sellers knew that buyers were bidding on everything very quickly. This January, demand is certainly weaker, but the data shows that supply is sufficiently tight and demand sufficiently strong to keep a floor on home prices. This indicator of price stability is a change from the very cold market of the third and fourth quarters of 2022, when demand was so weak, the price of the new listings was falling each week.  

We can use levels of price reductions as a leading indicator of future sales prices. Currently, 33.9% of properties on the market have taken price reductions in 2023, and this number is dropping. While this is a bit higher than the usual 30% in typical years, it’s way lower than the 43% we saw in December. This is one data point illustrating a bit of a surprising turnaround in buyer demand.

From the data we’ve collected near the end of January, we can already see that home prices have stopped the pullback we saw in the second half of 2022. Unless mortgage rates spike above 7% consistently in the next few months, it seems unlikely that home prices will drop substantially in 2023 as some market prognosticators have written. We simply have too few sellers to satisfy the current demand levels.

On the other hand, there’s no indication in the data that home prices will climb substantially either. We see some home buyer demand, but we also see that buyers will stop abruptly as rates rise and affordability weakens. This is why we expect home prices in 2023 to finish the year in a similar space as the end of 2022. 

In February, builder confidence in the market for newly built single-family homes rose seven points from January’s reading, to an index value of 42. This is the second consecutive month of gains after a year of decreases, and it is the index’s strongest reading since September 2022.

The NAHB/HMI report is based on a monthly survey of NAHB members, in which respondents are asked to rate both current market conditions for the sale of new homes and expected conditions for the next six months, as well as traffic of prospective buyers of new homes. Scores for each component of the builder confidence survey are then used to calculate an index, with any number greater than 50 indicating that more homebuilders view conditions as favorable than not.

The NAHB attributes the increase to the slight easing of mortgage rates, which the trade organization feels is a signal that the housings market might be turning, despite builders still dealing with high construction costs and supply chain issues.

“With the largest monthly increase for builder sentiment since June 2013, the HMI indicates that incremental gains for housing affordability have the ability to price-in buyers to the market,” Alicia Huey, an NAHB chairman, said in a statement. “The nation continues to face a sizeable housing shortage that can only be closed by building more affordable, attainable housing. However, the two monthly gains for the HMI at the start of 2023 match the cautious optimism noted by the large number of builders at the recent International Builders’ Show in Las Vegas, who reported a better start to the year than expected last fall.”

According to Huey, the most challenging part of the homebuilding market is the construction of entry-level homes, and he called on policymakers to “help by reducing the cost of developing lots and building homes via regulatory reform.”

Builders are continuing to offer a variety of incentives. However, data shows that things may be stabilizing. In November, 36% of builders were reducing home prices, but the percentage of builders who are dropping home prices declined to 31% in February. In addition, the average price drop decreased from 8% in December to 6% in February.

“While the HMI remains below the breakeven level of 50, the increase from 31 to 42 from December to February is a positive sign for the market,” Robert Dietz, the NAHB’s chief economist, said in a statement. “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. 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.”

Three other indices monitored by the NAHB also posted gains in February. The gauge measuring current sales conditions rose to 46, up six points month over month. The component analyzing sales expectations for the next six months rose 11 points to a reading of 48, and the index that charts traffic of prospective buyers rose six points from January to a reading of 29.

Regionally, the three-month moving averages for HMI rose in all four regions, with the West gaining three points to a reading of 30, the South rising four points to 40, the Northeast adding four points for a reading of 37 and the Midwest rising one point to a reading of 33.

Another survey, the BTIG/HomeSphere State of the Industry Report, also reported a leveling in homebuilder outlook.

According to the survey, 54% of builders saw a yearly decrease in sales last month, down from 71% in December. Despite a 41% yearly decrease in sales, builders again reported a slight improvement in performance relative to expectations, with 21% of respondents reporting that sales were better than expected, and 38% reporting that sales were worse than expected. These metrics improved from 11% and 35%, respectively, in December.

The BTIG/HomeSphere study is an electronic survey of approximately 50-100 small- to mid-sized homebuilders that sell, on average, 50-100 homes per year throughout the nation. In January, the survey had 107 respondents.

The January survey included a special question about the impact of mortgage rates, with 80% of builders reporting that lower rates have positively impacted business.

“Conditions continue to be sluggish overall, but we believe the environment is improving heading into the Spring selling season,” BTIG analyst Carl Reichardt said in a statement.

The slowdown in the Federal Reserve‘s short-term rate hikes, announced on Wednesday, was welcome news for the mortgage market and solidified expectations that the 30-year mortgage rates will drop throughout 2023.

While mortgage rates have been trending lower, rates are still higher than 12 months ago, but some experts anticipate that the downward pressure on rates will provide opportunities for buyers.

The Federal Reserve controls short-term rates, but long-term rates, including 30-year mortgage rates, are a function of market expectations for the path of the economy, Mike Fratantoni, senior vice president and chief economist at the Mortgage Bankers Association, said in a statement.

“Investors are betting that the economic slowdown and the Fed’s eventual victory over inflation will result in lower rates over time,” Fratantoni said. The MBA forecasts a modest drop in mortgage rates through 2023, ending closer to 5%.

Mortgages are mostly priced off of long-term rates, so the shape of the yield curve also matters, Shampa Bhattacharya, director at Fitch Ratings, said. The Fed’s latest decision to raise rates at a slower pace could be an “incremental positive for mortgage markets as the long-term rates will continue to drop.”

The 30-year mortgage rates peaked in November 2022 at over 7%, but have since trended down to 6.13% — following the moves in the longer end of the yield curve from over 4% in October and November to 3.5% currently, Bhattacharya said.  

The 10-year Treasury note, which dictates mortgage rate movements, dropped to 3.39% on Wednesday. The rate was 3.43% in mid-January when the Bureau of Labor Statistics released the Consumer Price Index for December, which showed a decline for six consecutive months.

Softer inflation recently is what led to a softer rate increase, Lawrence Yun, chief economist and senior vice president of research at National Association of Realtors said, noting that the central bank is showing its willingness to adjust policy based on data.

While Fed chairman Jerome Powell said in a press conference that he doesn’t “see us cutting rates this year,” Yun remained hopeful that a rate cut could come by the end of 2023. 

“As inflation calms further from rising apartment vacancies in upcoming months, the Fed will adjust to a no-rate increase by the middle of the year and even a rate cut by December. That is good news for mortgage rates, which will possibly fall to 5.5% by the year end,” Yun said.

The 30-year fixed rate was at 6.16% on Tuesday, a decline from 6.5% about a month ago, according to the Optimal Blue data at HousingWire’s Mortgage Rates Center. Rates are still nearly 60% higher than they were one year ago at 3.8% in February 2022. 

There are concerns, however, that the rising interest rates will lead to many homeownership dreams deferred, Justin Barry, partner at law firm Morris, Manning & Martin, noted.

“Rising interest rates and elevated mortgage rates present another homeownership hurdle for the current renter pool,” Barry said. 

Opportunity for buyers

For buyers looking at a growing number of homes for sale and retreating prices across the housing market, there is hope that this year will offer more opportunities.

“Median list prices have dropped 11% from their June 2022 peaks,” George Ratiu, manager of economic research at Realtor.com, said.

“For the buyer of a median-priced home, these lower prices translate into a $9,800 savings on a 20% down payment. This is a welcome shift for households still feeling the squeeze of higher prices and elevated borrowing costs,” he added.

Existing home sales declined over the past 12 months, dropping from an annualized rate of 6.5 million homes in January 2022 to a little more than 4 million in December. That marks the slowest pace since 2010. 

U.S. home prices have dropped for five straight months starting last November, according to this week’s S&P CoreLogic Case-Shiller National Home Price Index.

Mortgage loan originators don’t expect the Fed’s rate hike to impact buyers as much. First-time buyers in particular have become more realistic about the higher-rate environment and are looking to enter the market, LOs said. 

“I think you’re going to see a much bigger push for first-time homebuyers more than anything,” Ben Cohen, Guaranteed Rate’s managing director, said in a recent interview with HousingWire. 

“Rents are more expensive. Their landlords are calling them saying, ‘I’m jacking your $2,500 rent up to $3,000.’ They’ll just go buy a home,” Cohen said. 

Andrew Marquis, regional vice president at CrossCountry Mortgage, also noted that he’s doing twice as many pre-approvals that he was doing in the fall due to the decline in rates.

“We have a lot of clients reaching out for pre-approvals. They’re looking for fully underwritten approvals so that they can potentially waive contingencies again,” Marquis said.

Can we have a soft landing in the economy? Friday’s job report shows there is a clear pathway to get there. Mortgage rates fell aggressively down to 6.20%, putting us at more than 1% below the highs of 2022.

The bond market saw that wage growth was cooling down, leaving the Federal Reserve with few reasons to keep the rate hike story going much longer.

We ended 2022 on a solid note as 4.5 million jobs were created last year — and we still have more than 10 million job openings and historically low jobless claims. And now, the growth rate of inflation is falling.

Bond yields fell after the report since wage inflation is cooling down, a key for the Federal Reserve‘s strategy. The Fed will not tolerate a tight labor market, or Americans on the lower end of the wage pool making more money. They believe this is a bad thing and will create too much entrenched inflation, so the fact that wage growth is cooling off is a positive sign.

If the inflation growth rate and wage growth are slowing down, the Federal Reserve doesn’t need another rate hike. In fact, the Federal Reserve needs its own reset. That is going to be a big theme of mine for 2023 if this trend continues.



However, the bigger story here is there is a pathway for a soft landing for America, and the Fed should be ashamed of itself for believing that a job loss recession is the best way to kill inflation. The inflation growth rate is already falling and the labor market is still solid.

If shelter inflation had a more real-time tracking system, the headline inflation data would already be lower. Thankfully, the Fed has created its own index to account for much of the lagging inflation in the data line. This is a big deal since nearly 43% of CPI inflation is shelter inflation.


This is why Friday’s data is exciting to see and why the bond market sent mortgage rates to 6.20% and yes — we are back on 5-handle mortgage rate watch. It wasn’t that long ago (in October) that people were talking about 8%-10% mortgage rates and a big recession for the United States of America.

Job report

From BLS: Total nonfarm payroll employment increased by 223,000 in December, and the unemployment rate edged down to 3.5 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in leisure and hospitality, health care, construction, and social assistance

This chart shows a breakdown of the jobs created and lost. The two sectors of the economy that are getting hit are the tech sector and housing, but this is a good report for construction. The backlog of homes needing to be built has kept construction labor up until those homes can be finished. I can’t express what a blessing this is because the best way to fight inflation is always by adding more supply. 

Here’s a breakdown of the unemployment rate tied to the education level for those 25 years and older.

• Less than a high school diploma: 5.0%  (previously 4.4%)
• High school graduate and no college: 3.6%
• Some college or associate degree: 2.9%
• Bachelor’s degree or higher: 1.9%

As we can see above, the labor pool for college educated workers is lacking; this is a big reason the unemployment rate is below 2%. The work visa supply of labor just isn’t enough to supply this pool.  

The unemployment rate has found a bottom of around 3.5%, and I want to remind people that the growth rate of inflation is falling even with the unemployment rate still at 3.5%.

You don’t need to create a job-loss recession to bring inflation down. I understand why some people believe this. However, before COVID-19 happened, we didn’t have breakaway inflation in the 21st century, either here or in other mature economies where population growth is slowing.

Inflation and bond yields

The real story of today is that bond yields are again getting ahead of the Federal Reserve. No matter how many Fed people talk about needing financial conditions tighter for months now, the bond market is saying otherwise.

The Fed’s premise that a job-loss recession is needed to bring down inflation should be pushed back by everyone. If the growth rate of inflation was still running out of control with wage growth exploding higher, then we would be having a different conversation. However, I truly believe that the bond market was always telling us that this wasn’t the 1970s. 

The 1970s saw higher inflation and higher bond yields, and the inflation back then was more entrenched. The 10-year yield, as I speak, is at 3.58% Friday, even after all we have gone through. The growth rate of core PCE inflation, which the Fed wants back down to 2%, should have a three-handle this year.

I made a case for lower mortgage rates on Oct. 27, 2022, and then wrote about how we could still avoid a job-loss recession in November. In both articles, one factor was key: the growth rate of inflation falling. This is happening now, even with a labor market that still has over 10 million job openings.

The second key is falling bond yields; I am not even discussing cutting rates yet. First things first, the growth rate of inflation falls, and the bond market yields fall with it.

For now, both things are falling from their recent peaks. The Fed can’t control Russia, OPEC, or the bird flu, and the U.S. dollar isn’t collapsing. However, any rate hike at this point is on them. They have expressed their beliefs about moving the Fed funds rate to where core PCE is, and if the trend of inflation continues as it is, the 10-year yield is more correct than the Fed today.

To sum it up, we had another solid jobs report Friday: the unemployment rate is low, job openings are high and jobless claims are historically low. I truly believe that at this economic expansion stage, the Fed doesn’t need to continue its path of sounding like a hawk because we already see evidence of inflation falling.

Let’s not forget the biggest driver of inflation for the CPI report is shelter inflation, and that is already cooling off dramatically.

The Fed should think about becoming a dual-mandate organization again at some point since they front-loaded so many rate hikes early on. They should let that stick and watch the data get better. I don’t know if they’re this clever or know that they can take the victory lap. However, what we have seen in the last few months has been very encouraging for those who don’t want to see a job loss recession.

Marty Green thinks of the housing market in 2022 as two very different movies. The first half of the year, with mortgage rates in the 3s and 4s, was like “Fast and Furious.” Houses were selling at a fever pitch in a matter of days, with multiple offers, waived contingencies and buyers paying $100,000(!) over asking price. High octane stuff.

But the housing market in the second half of 2022? “The Big Chill” or “Frozen,” says Green, principal at real estate law firm Polunsky Beitel Green. The number of home listings dried up, contracts were canceled, the few buyers still out there demanded concessions, mortgage rates spiked to 7% and homebuilder sentiment hit rock bottom.

By September, a full-fledged housing market recession had set in.

“The 2002 housing market has been a tale of two halves,” said Green.

And, the market looks likely to remain frozen well into 2023, experts told HousingWire.

A mortgage rate lockdown freezes the housing market

Homeowners who refinanced during the pandemic simply aren’t going anywhere, according to Nick Smith, managing partner and CEO at Rice Park Capital Management.

“They are not selling and have a lot of equity in their homes. The higher mortgage rates are also putting a wet blanket on demand for new housing,” he said.

Thanks to the Federal Reserve’s benchmark rate being near zero for two full years and generating record-low mortgage rates, a tiny minority of homeowners now have an incentive to refinance at all in 2023. The elevated mortgage rate environment has created a mortgage rate lockdown effect of sorts, limiting the pool of customers for the mortgage industry.

With homes taking longer to sell, due in part to higher mortgage rates, buyers in 2022 had negotiating power to get concessions or credits to lower rates down for a limited period. Those trends are likely to continue in 2023.

Temporary rate buydowns have become a popular concession, especially among homebuilders, in which one out of 10 loans feature a seller-paid buydown, said Peter Idziak, senior associate at Polunsky Beitel Green. Adjustable-rate mortgages are also in vogue, enabling buyers to partially combat historically bad home affordability.

Homeowners in 2022 also tapped into their home equity, which peaked at $11.5 trillion in the second quarter of 2022, capitalizing on home equity loans and home equity line of credit (HELOC). In the third quarter of 2022 alone, HELOC and home equity loan originations rose 47% and 43% year over year respectively, according to Transunion‘s latest available data. 

With debt levels rising and a recession looming, it’s easy to see more people turning to the equity in their homes to pay down credit cards or make up for a liquidity shortfall caused by job loss.

“With the economics of cash-out refinance worsening amidst higher rates, homeowners are showing increased willingness to use home equity lines of credit (HELOC) and home equity loans to tap equity,” a Housing Finance Policy Center report states.

Layoffs, LOs leaving the industry for good 

The mortgage industry shrinking by more than half to an estimated $1.7 trillion in 2022 from 2021 meant mortgage lenders have had to cut costs – primarily through layoffs.

Top 10 lenders, including Wells Fargo, Pennymac, Guaranteed Rate and loanDepot, have gone through multiple layoffs throughout the year, and smaller local lenders, which aimed to expand by targeting the purchase market, were hit just as hard, if not harder. 

Other smaller lenders, including real estate tech startup Reali and Sprout Mortgage, shuttered, while First Guaranty Mortgage Corp filed for Chapter 11 bankruptcy. Some smaller players, including Inlanta Mortgage, which were hiring LOs and branch managers in the summer, abruptly announced to shut down earlier this month, citing an “unanticipated drop in mortgage product demand.”

The top loan originators, who exceeded the landmark $1 billion in origination volume in each of the past two years, weren’t immune to rising rates either. Shant Banosian, executive vice president of sales at Guaranteed Rate, laid off about 50% of his team, and Thuan Nguyen, CEO of Loan Factory, reduced his company size by half this year. 

The top producing LOs who focused on purchase mortgages were positioned in a better spot than those whose business depended on refis. Banosian, whose loan origination volume will be close to $1 billion in 2022, said he turned housing market headwinds into an opportunity to target new geographic markets. 

With a huge increase in remote work and his core group of clients buying homes across the country – whether it be vacation homes, more affordable areas, or for new work opportunities – Banosian was at risk of losing clients when they went to states his team wasn’t operating in. 

“As they (existing clients) went to do business in these new states, we figured out where the real estate agents are, and who the players are, where the markets they’re buying and did some research and started making phone calls,” he said in an interview with HousingWire. 

The LOs who are in it for the long haul have gone old school: meeting up with real estate agents, getting licenses in multiple states and utilizing social media to get their names out. Those who joined during the refi boom or didn’t build referral relationships have permanently exited the industry. Or will soon.

Loan officer headcount in the industry could decline by 45% from last year’s estimated 353,120 LOs nationwide, which expanded by 34% from 2019, according to projections from Stratmor Group.

If the industry experiences a 65% drop in origination volume from the peak in the fourth quarter of 2020 to a trough in the first quarter of 2023, the Mortgage Bankers Association projects production employment will likely need to be scaled back by 24 to 31%.

“We are also going into the seasonally lower winter months, so we should expect lower volumes to continue at least for the next two quarters,” said Shampa Bhattacharya, director for U.S. non-Bank financial institutions at Fitch Ratings.

“Everybody is going to have a black eye here. It’s not a lack of desire for loans, the loans don’t exist,” Brian Hale, founder and CEO at Mortgage Advisory Partners, said.

After inflation slowed more rapidly than expected in November, the Federal Reserve raised the federal funds rate by 50 basis points on Wednesday to 4.25%-4.50%, a smaller interest rate hike than the 75 bps per meeting the Fed policymakers have stuck to since June.

This slowdown is good news for the housing industry, as it may lead to a decline in mortgage rates.

The decision from the two-day Federal Open Market Committee meeting is, all things said, encouraging news for the housing market, which has suffered from elevated home prices, a lack of inventory and high mortgage rates that have chilled activity.

Fed chairman Jerome Powell on Wednesday noted that “the appropriate thing to do now is to move to a slower pace.”

Policymakers now expect to lift borrowing costs to 5.1% by the end of 2023, up from a projected 4.6% in September when estimates were last published. Fed officials do expect to begin lowering rates in 2024, but they anticipate bringing them down slowly.

While Powell said that it will take time for the full effects of the monetary restraint to be realized, the chairman noted that policymakers are “seeing the effects on demand in the most interest-sensitive sectors of the economy, such as housing.”

Housing services inflation has been very very high and will continue to go up before coming back down sometime next year, Powell said of the industry that has been in a recession.

“As rents expire and have to be renewed, they are going to be renewed into a market where rates are higher than they were when the original leases were signed,” he said. “But we see that the rate for new leases are coming down, so once we’ve worked our way through that backlog, that inflation will come down sometime next year.”

Powell reiterated the central bank’s commitment to increasing interest rates to bring inflation to 2%.

“We continue to anticipate that ongoing increases will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive, to return inflation to 2% over time,” Powell said.

In determining the pace of future increases in the target range, the committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments, according to the FOMC statement. 

“In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May,” the statement said.

The Fed’s mission to fight surging inflation started in March when the central bank raised the benchmark rate by 25 bps. That rate increase was followed by a hike of 50 bps in May, four straight hikes of 75 bps hikes in June, July, September and November, and a 50 bps increase in December. 

The central bank targets 2% inflation on an annual basis, but price increases were running at about three times that pace this year through October, based on the Personal Consumption Expenditure price index – the Fed’s preferred inflation gauge.

The Consumer Price Index, a more timely inflation measure, showed inflation slowing more rapidly than expected in November. The CPI rose 7.1% year over year in its lowest reading in a year. Year-over-year consumer price inflation peaked at 9.1% in June, but price growth has declined since then, slowing from October’s 7.7% and landing lower than economists’ expectations of 7.3% in November. 

On the back of encouraging signs that inflation-fighting measures are working, investors have speculated that central bank policymakers would pursue a less aggressive policy path in 2023. 

Excluding the volatile food and energy prices, the so-called core CPI rose 0.2% from October and 6% on an annual basis, according to the Bureau of Labor Statistics. 

Services inflation, which tends to move in correlation with rising wages, remained strong due to rapid increases in rent, which rose 7.9% year over year. The labor market also remains robust, as employers added 263,000 jobs in November and unemployment levels are at 3.7%.

Indication for mortgage rates

While the Fed’s short-term rate does not directly impact long-term mortgage rates, it does steer market activity to create higher rates and reduce demand.

Mortgage rates have been declining after peaking past 7% levels in October following slower-than-expected inflation readings that month. The 30-year fixed mortgage rate declined to 6.30% on Tuesday, according to the HousingWire Mortgage Rates Center.

Mortgage demand rose 3.2% last week, which was driven by increases in purchase and refinance activity compared to the previous week as financial markets reacted to mixed signals regarding inflation and the Fed’s next policy moves, according to the Mortgage Bankers Association.

However, with rates more than three percentage points higher than a year ago, both purchase and refinance applications are still well behind last year’s pace, said Joel Kan, vice president and deputy chief economist at the Mortgage Bankers Association. 

“At this point, mortgage rates have fallen 1%, with the markets knowing we still have some more Fed rate hikes coming,” Logan Mohtashami, lead analyst at HousingWire, said. 

The market has baked in a 50 bps rate hike — and that is “the right call” after the weaker CPI reading, he added.

“The ongoing moderation in home-price growth, along with further declines in mortgage rates, may encourage more buyers to return to the market in the coming months,” Kan said. 

The MBA expects the average 30-year fixed mortgage rate to fall to 5.2% in 2023. The latest MBA forecast showed mortgage rates will finish the year at 6.7%.

The next two-day FOMC meeting is scheduled for January 31 and February 1.

Homebuilder sentiment dropped yet again in December, hitting its lowest reading since mid-2012, with the exception of the onset of the COVID-19 pandemic in the spring of 2020. This drop marks one full year of declines in builder confidence, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) report, released Monday.

In December, builder confidence in the market for newly built single-family homes fell two points compared to November. The month ended at 31 points — less than half the level it was at six months ago.

The NAHB/HMI report is based on a monthly survey of NAHB members, in which respondents are asked to rate both current market conditions for the sale of new homes and expected conditions for the next six months, as well as traffic of prospective buyers of new homes. Scores for each component of the builder confidence survey are then used to calculate an index, with any number greater than 50 indicating that more homebuilders view conditions as favorable than not.

“The silver lining in this HMI report is that it is the smallest drop in the index in the past six months, indicating that we are possibly nearing the bottom of the cycle for builder sentiment,” Robert Dietz, the NAHB’s chief economist, said in a statement. “Mortgage rates are down from above 7% in recent weeks to about 6.3% today, and for the first time since April, builders registered an increase in future sales expectations.”

As builders look to improve their sales, 62% reported using incentives, including providing mortgage rate buydowns, paying points for buyers and offering price reductions. However, builders can only slash prices so much.

“With construction costs up more than 30% since inflation began to take off at the beginning of the year, there is little room for builders to cut prices,” NAHB chairman Jerry Konter said in a statement. “Only 35% of builders reduced homes prices in December, edging down from 36% in November. The average price reduction was 8%, up from 5% or 6% earlier in the year.”

Looking ahead, Dietz recommended that builders plan one year or more out when thinking about land and construction timelines.

“NAHB is expecting weaker housing conditions to persist in 2023, and we forecast a recovery coming in 2024, given the existing nationwide housing deficit of 1.5 million units and future, lower mortgage rates anticipated with the Fed easing monetary policy in 2024,” Dietz added.

Three other indices monitored by the NAHB also had varied results in December. The gauge measuring current sales conditions fell to 36, down three points month over month, while the component analyzing sales expectations for the next six months rose four points to a reading of 35. The index that charts traffic of prospective buyers held steady from November at a reading of 20 points.

Regionally, the three-month moving averages for HMI scores fell in all four regions, dropping to 34 in the Midwest, 36 in the South, 26 in the West, and 37 in the Northeast.

Another survey, the BTIG/HomeSphere State of the Industry Report, also noted sizable decreases in homebuilder outlook. According to the survey, 71% of builders saw a yearly decrease in sales last month, compared to 16% a year ago. In addition, 69% of builders reported year-over-year declines in traffic in November, while only 7% of respondents saw traffic as better than expected — a record low for the survey.

The BTIG/HomeSphere study is an electronic survey of approximately 50-100 small- to mid-sized homebuilders that sell, on average, 50-100 homes per year throughout the nation. In November the survey had 126 respondents.

“Conditions deteriorated for the third month given higher mortgage rates, fear of falling real estate values and poor confidence among consumers,” BTIG analyst Carl Reichardt said in a statement.

When asked about sale expectations for 2023, 51% of respondents believe new contracts will decrease next year from 2022, while 33% believe new contracts will be up in the new year.