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This morning's data makes it 8 of the last nine weeks that the MBA Mortgage Purchase Applications index fell sequentially. The index dropped another 2% this morning falling to its lowest level since 1996 in spite of record low mortgage rates. The Purchase Applications Index is a good proxy for overall demand as it captures at least 50% of all mortgage purchase application volume.

Home prices are a simple function of supply and demand, but housing assets are sticky assets and reprice with a lag. We've found the lag to be one year. As such, record low demand today will manifest in materially lower home prices a year from now. We are now two months removed from the stimulus expiration and are still hitting new lows in demand. We'll keep a close eye on the remaining summer months to see whether demand rebounds as we get further removed from the stimulus expiration.

HOUSING DEMAND CONTINUES TO FALL - shark chart

 

As a reminder, housing demand is positively correlated with affordability, meaning that demand wanes as prices go down. Similar to retail investors chasing performance, the math suggests that as home prices increase either as a result of high mortgage rates or appreciation of home values, more buyers come to the table. This is in stark contrast to the consensus belief that high affordability will stimulate housing demand and help clear burgeoning inventory.

 

HOUSING DEMAND CONTINUES TO FALL - sheep chart

 

Joshua Steiner, CFA

Allison Kaptur