Rebound in mortgage rates hits housing demand

Stronger-than-expected economic data in January led to a rebound in market interest rate expectations and a jump in mortgage rates from 6.2% at the start of February to 6.8% in March. That drove mortgage applications for home purchase lower and means existing home sales are likely to stay close to their current lows for the next couple of months. The rise in mortgage rates means the improvement in affordability seen in recent months is set to stall. Given that affordability still looks stretched, we expect house prices to drop a further 5% this year, leaving them down 8% from their peak in June 2022. Meanwhile, apartment demand took another hit in January and is likely to slow further as the economy enters a mild recession this year. This, coupled with a flurry of new supply, means we are forecasting a below-consensus fall in multifamily rents this year.