Tracking the number of mortgage applications for purchase (“MAFP”) is a strong barometer of trending sales. When MAFP increase, home sales rise. Conversely, a downturn in MAFP means less homes selling.

In July, the Mortgage Bankers Association (“MBA”) reported MAFP fell to their lowest level in 22 years and continued to fall 1.4% in the first week of August. Compared to last year, MAFP were almost 20% lower.

Sarasota County followed suit with a slowdown in home sales, 24% less than last year, notwithstanding an unemployment rate at 2.6%, amongst the lowest unemployment rates in the country. Pended sales, i.e., homes that went under contract in July are a further forward-looking indicator of home sales over the next 2 months. There were 13.4% less pended sales in July 2022 than July 2021, and 6% less new listings.

Recent Fed funds rate increases, which pushed mortgage rates to a high of 6.06% in June, have been a major driver to a slowdown in home sales as more buyers were sidelined, not because of a lack of demand, but due to affordability and doubts about the economy’s strength. By the end of July, the 30-year fixed rate mortgage came off its June high to close at 5.30%.

This past spring, when mortgage interest rates increased to 4 – 4.5%, homes going under contract continued to rise. It was not until May, when rates broke above 5%, that we saw less homes pending. When rates get back into a 4 – 4.5% range, which I think is a real possibility for reasons explained immediately below, home sales should increase.

Currently, the average turnover rate for home sales is 10 years. Accordingly, the yield on the 10-year Treasury is used as a proxy for setting mortgage interest rates. However, whereas the 10-year Treasury is backed by the government, mortgages carry greater risk due to early repayment through refinancing, selling or default. Because of its greater risk, mortgage rates tend to track the yield on the 10-year Treasury at an approximate two times factor.

Barring a major recession, as the Fed tames inflation, investor confidence will grow. Investors in 10-year Treasurys and mortgage-backed securities will be amongst the first to react because they have a long-term view. If so, when rates come down to 2022 spring levels of 4 – 4.5% range, sales will increase fortified by more sellers who delayed listing their home for sale. We have a long way to go to bring inflation under control and avoid a major recession, but there are some hopeful signs. Core inflation held steady in July, and gas prices fell. I would not be surprised if this turnaround is within a 6-month horizon, following the mid-term elections. Although inventory increased to a 2-month supply due to less homes selling, sold prices continue to rise. In Sarasota County, the median sold price of an existing single-family home rose 4% from June to $520,000. That’s 30% higher than last year. Average days on the market, 21 days. Virtually unchanged. So, there is no lack of demand. What we continue to lack is supply. There are simply not enough homes for sale. Only more new listings will satisfy demand. It is a slow walk, but it is happening, and with it, the rate of appreciation will slow down.