According to HousingWire, there's actually a path for mortgage rates to dip below 7% during the holiday season, even though it might seem unlikely given recent inflation and economic strength. The key is that bond markets had some significant movement last week that reopened the possibility of lower rates for Halloween, Thanksgiving, Christmas, or New Year's. It's a scenario that was off the table not long ago, but recent market dynamics have put it back into play.
For rates to actually get below 7%, four specific things would need to happen together. First, tensions in the Middle East would need to cool down and oil prices would need to fall. Second, if there's any slowdown in AI company expansion or financing troubles, that could help bonds rally. Third, trade policy would need to stay stable without additional tariffs being imposed. Fourth, the labor and economic data would need to soften somewhat, which would help yields move lower. The flip side is also true: if any of these factors move in the opposite direction, rates could easily stay elevated or even rise further.
Right now, mortgage spreads are the real story to watch in housing. These spreads recently climbed to 2.21%, which is notably higher than their historical range of 1.60% to 1.80%. While spreads haven't reached the crisis levels we saw in 2023 and 2024, this widening can create real problems for both existing home sales and future housing construction if it gets worse.
Housing inventory is up about 5% year over year, and we're seeing some seasonal weakness in new listings coming into the holiday period. The year has actually been pretty healthy for new listings compared to recent years, and sellers don't seem to be sitting on the sidelines waiting for rates to drop like they were doing a few years back. Price cuts are becoming more common as rates have climbed, and pending sales data shows demand has clearly cooled compared to this time last year when rates were significantly lower.
Buyer activity, measured through purchase applications, is showing real weakness with a 16% year-over-year decline. This tracks with what we've historically seen: when rates push above 6.64%, housing demand tends to soften, and we're well above that mark now at 7.37%. We've been at these elevated rate levels since mid-July, and the question now is how much longer buyers will stay on the sidelines.
What I'm seeing locally here in the Bay Area and East Bay is consistent with this national picture. Our market has been feeling the pressure of higher rates for several months now, and buyer activity has noticeably slowed compared to where we were a year ago. If those four conditions align and we do see rates slip below 7%, I think we'd see an immediate pickup in activity, but until then, sellers need to be realistic with pricing and buyers should understand that patience may not necessarily be rewarded if rates do eventually come down.
