Economists' Outlook

Housing stats and analysis from NAR's research experts.

With Higher Mortgage Rates and Home Prices, REALTORS® Reported Slower Homebuying in July 2018

In a monthly survey of REALTORS®, respondents are asked “Compared to the same month last year, how would you rate the past month's traffic in neighborhood(s) or area(s) where you make most of your sales?” Respondents rate seller traffic as “Stronger” (100), “Stable” (50), or “Weaker” (0) and the responses are compiled into a diffusion index. An index greater than 50 means that more respondents reported “stronger” than “weaker” conditions.

REALTORS® reported slower homebuying activity in July 2018, according to the  July 2018 REALTORS® Confidence Index Survey. The REALTORS® Buyer Traffic Index registered at 62, down from the same month one year ago (69). This is the fifth straight month (since March 2018) that Realtors® reported a decline in buyer activity compared to conditions one year ago. The decline in the REALTORS® Buyer Traffic Index mirrors the trend in NAR’s tally of existing home sales that showed a year-over-year decline in sales since March 2018.

NAR also asks REALTORS® about current market conditions and the outlook in the next six months in the single-family homes market. Both the REALTORS® Confidence Index: Single-family Current Conditions and the REALTORS® Confidence Index: Single-family 6-Month Outlook also declined compared to one year ago.

The indices are still all above 50, which means that there are more respondents who reported a stronger than a weaker market for the reference month compared to conditions one year ago. However, a lower index means a smaller fraction of respondents reported a stronger market (than a weaker market) in their business area.

The increase in the mortgage rates and higher home prices since January 2018, have combined to make a home purchase less affordable. Freddie Mac’s contract 30-year fixed mortgage rate rose from an average of 4.03 percent in January to a peak of 4.59 percent in May 2018 and stood at 4.53 percent in July 2018, while the median price of existing homes rose from $240,800 in January 2018 and peaked to $273,800 in June 2018, then slid slightly to $269,600 in July.

Assuming a 10 percent down payment[1], the monthly mortgage rose from $1,030 in January 2018 to $1,233 in July 2018 (increase of $233/month). The mortgage payment is still affordable —at 15 percent of the estimated household income of a 2-wage earner family (933/week/earner)—but this is slightly up from 13 percent in January 2018. Households whose housing expense make up more than 30 percent of income are considered cost-burdened.[2]

Mortgage rates eased somewhat in July 2018, to 4.53 percent, from a peak of 4.59 in May 2018, while the median price of an existing home also decreased to $ 269,600 from $273,800 in June 2018, leading to a slight decrease in mortgage payment in July 2018 from June 2018.

With the unemployment rate at 3.9 percent and core inflation at 2.4 percent in July 2018, the expectation is a continued gradual increase in the federal funds rate, which will also bump up mortgage rates. NAR Chief Economist forecast the 30-year mortgage rate to average 4.6 percent in 2018 and 5.1 percent in 2019.

Estimate of Impact of Higher Mortgage Rate on Existing Home Sales

Higher mortgage rates tend to dampen home sales, as shown during the period when mortgage rates rose in mid-2013 (‘taper tantrum’ period) and starting in the fourth quarter of 2016 as the Federal Operations Market Committee embarked on a gradual increase in the federal funds rate in line with its mandate to foster growth and to keep inflation near two percent. Home sales have remained essentially flat since the fourth quarter of 2016 given the series of gradual rate increases.

De Fusco and Paciorek (2014) estimated that a one percentage point increase in mortgage rates decreases mortgage demand by 2.5 percent.[3] Using this elasticity, I estimated that the 72 basis point increase in 30-year fixed rate mortgage in September 2017 and July 2018 reduced existing home sales by an annualized rate of 100,000 units (from 5.37 million to 5.27 million annualized sales).  The seasonally adjusted annual home sales in July 2018 was 5.34 million. The unexplained difference (5.34 million less 5.27 million) may be due to other factors that boosted demand, such as an increase in employment.

[1] The median amount financed is 90 percent, according to NAR’s 2017 Home Buyers and Sellers Report;

[2] HUD, Rental Burdens: Rethinking Affordability Measures,

[3] De Fusco and Paciorek, The Interest Rate Elasticity of Mortgage Demand: Evident from Bunching at the Conforming Loan Limit,