Mortgage Activity Fell Almost 37% Year Over Year -- So Why Are Homes Still So Expensive?

It's fair to say that 2023 has been an expensive year to borrow money. That largely has to do with the numerous interest rate hikes that have been implemented by the Federal Reserve over the past 18 months and change.

Recent data from TransUnion shows that between the third quarter of 2023 and the third quarter of 2022, credit card originations fell almost 4%, while auto loan originations fell almost 9%. And personal loan originations were down 14.5%.

But the loan product to see the biggest drop in originations was mortgages. Between Q3 2023 and Q3 2022, mortgage lenders wrote 37% fewer loans.

Given that trend, you'd think home prices would have dropped over the past year or so. After all, a smaller number of mortgage signings would seem to be indicative of a decline in buyer demand, right?

But unfortunately, it's not that buyer demand has really slowed. Rather, it's that real estate inventory has been sluggish for a long time. And that explains why homes are still so expensive to buy.

There's just not enough supply

In September, the median existing home sold for $394,300, says the National Association of Realtors (NAR). That's a 2.8% increase from a year prior.

The reason home prices remain strong despite such high borrowing rates is that inventory is sorely lacking. As of the end of September, there were only 1.13 million unsold housing units on a national level, says the NAR. That represents just a 3.4-month supply of available homes for sale. It can take up to a six-month supply of homes to meet buyer demand in full.

A circular problem

A big reason U.S. inventory has been unable to increase has to do directly with today's mortgage rates. Many current homeowners have reasonably low interest rates on their mortgages because they either signed their loans before rates started climbing, or they refinanced their mortgages to lower rates when they became available in 2020 and 2021.

But homeowners in that boat aren't so eager to double their mortgage rates or more by signing new loans today. As such, they're staying put -- and keeping inventory at a low.

Now, it's fair to say that today's mortgage rates, which are notably high, may be pushing some buyers out of the market -- hence a 37% decline in year-over-year mortgage originations. But that drop can also be attributed to the fact that there just haven't been homes to buy. And when there aren't homes available to purchase, buyers just plain don't need mortgages.

When will the housing market improve?

Although the Federal Reserve does not set mortgage rates, its actions influence them, as is the case for other loan products as well. There's a good chance the Fed will start to cut rates at some point in 2024 if inflation continues to cool. Once that happens, mortgage rates could start to drop, perhaps loosening up the market to some degree.

But it's unlikely that mortgage rates will reach the record lows buyers were enjoying in 2020 and 2021 anytime soon. So unfortunately, we may be in for an extended period of sluggish real estate inventory.

Buyers can try to get around that by seeking out new construction opportunities if their budgets allow for it, or by expanding their home searches to different neighborhoods. But ultimately, for a lot of buyers, patience may end up being the key to snagging their dream homes.

As for those who are worried about today's mortgage rates, the good news is that rates are apt to drop at some point. Then, it's possible to look at refinancing. So if you can afford a home today, and you manage to find one that meets your needs, you may want to jump on the opportunity, even if it ends up being a pretty expensive one.