Housing market 'stagnant but determined' as mortgage rates surge past 7%, Rocket CEO says

By Aarthi Swaminathan

30-year mortgage rates are expected to remain elevated after hotter-than-expected CPI data for March

The U.S. economy is still hot, which means that the real-estate industry will face headwinds in the coming months due to higher mortgage rates.

Stronger-than-expected economic data relating to the labor market and to consumer prices pushed the average rate on a 30-year mortgage up 23 basis points on Wednesday afternoon to 7.29%, according to a daily survey of lenders by Mortgage News Daily.

The higher mortgage rates go, the less buyers can afford to pay for a home. It also means that homeowners with lower mortgage rates will continue to feel locked in to their current mortgage and less inclined to move, one mortgage-company CEO told MarketWatch.

"If you're sitting on a low rate or a medium rate, you're more likely to be more picky about when you want to buy and sell a home," Varun Krishna, CEO of Rocket Cos. and Rocket Mortgage (RKT), told MarketWatch in an interview. "So it's going to have some impact on inventory."

Whether the economy is still hot or is showing signs of slowing down matters to the Federal Reserve. If the Fed views the data as symptomatic of a strong economy, it could hold off on making rate cuts, which in turn would pressure mortgage rates up. Realtor.com's chief economist, Danielle Hale, said that the inflation data released Wednesday make it more likely that the Fed will not cut its benchmark interest rate starting in June, as some had previously expected.

Consequently, the real-estate market remains "stagnant - but determined" in the face of higher mortgage rates, Krishna said.

There's considerable pent-up demand for homes, but it's being held in check by higher rates.

"Millennials are forming households, having children and moving into their peak home-buying age - more than 12,000 are turning 35 a day, the largest cohort to do so on record," KPMG chief economist Diane Swonk wrote in a recent note about the outlook for the housing market.

For this group, "the desire to buy remains elevated, despite low affordability," she said, and "the largest hurdle to acting among high-income prospective buyers is a drop in rates."

Another challenge the housing market faces is that it's undersupplied, meaning that there aren't enough homes on the market to meet demand. Many homeowners are locked into their relatively low-rate mortgages, resulting in a shortfall of resale homes. The U.S. is overall short 1.5 million housing units, the National Association of Home Builders said earlier this year.

Against this backdrop, the housing market is in a "period of waiting" for a catalyst, Rocket's Krishna said, which the industry believes to be lower mortgage rates. "Stagnation may be the current reality, but don't mistake the resilience and determination of the industry to bounce back," Krishna added.

Higher rates have been painful for mortgage lenders as well as home buyers. In the fourth quarter of 2024, independent mortgage banks lost $2,109 on each loan that they originated, because it was unprofitable for them to underwrite and issue the loan to the borrower at current mortgage rates, according to the Mortgage Bankers Association.

To offset the drop in business, lenders are trying to position themselves for when that demand comes back.

Rocket recently launched a new platform called Rocket Logic, which is driven by artificial intelligence. According to the company, it saves nearly 10,000 hours of labor a month by automating tasks that involve documents, such as identifying documents that home buyers and homeowners submit to Rocket as well as extracting information from the paperwork.

The mortgage industry has generally been slow to adopt artificial intelligence and machine learning, according to a 2023 survey by Fannie Mae.

But for some lenders, the current slower market conditions make this an opportune moment to jump into AI. "We see about a million and a half documents every month," Krishna said, so "the better we can get at automating the process of taking, classifying and extracting documents, it just makes us more productive."

And "we're just scratching the surface" with AI and mortgage lending, he said.

How have higher mortgage rates and home prices affected you? We want to hear from readers who have stories to share about the effects of increasing costs and a changing economy. If you'd like to share your experience, write to readerstories@marketwatch.com. A reporter may be in touch.

-Aarthi Swaminathan

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04-11-24 1032ET

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