Homebuyers react more to changes in mortgage rates than actual rates, Compass CEO says

• Buyers react more to the change in mortgage rates than the actual rates themselves, Compass CEO Robert Reffkin said.
• The rate relief comes as inventory is loosening up, which is an encouraging sign for buyers.

Mortgage rates have tumbled, bringing more homebuyers off the sidelines, but they are still high compared to pandemic-era levels.

What gives?

"We see over cycles that buyers react more to the change in mortgage rates, more than the actual mortgage rate itself," Compass CEO Robert Reffkin said on CNBC on Tuesday. "It suggests that next year will be a very good year."

Mortgage rates have fallen 8% in October to below 7% in a couple months. That's the fastest drop in rates since the housing market crash in 2008.

And they've been in a decline because markets are expecting the Federal Reserve to switch from rate hikes to rate cuts next year.

But for the housing market, the timing of the first rate cut is critical, as the typical selling season kicks off in the spring.

"A key question is will the Fed lower rates in the March meeting before the spring market, or in the May meeting afterwards," Reffkin said.

That's because whenever the Fed does decide to cut rates, bond yields and mortgage rates are likely to slide in response.

Meanwhile, more rays of sunshine are flashing on the housing market. November housing starts data blew past expectations, jumping nearly 15% on the month.

The supply of available homes has also started to tick up, albeit from depressed levels, after high rates froze the housing market.

"For the first time, all the key metrics on the inventory side and the buyer side are pointing in the right direction," Reffkin said. "We have 4% more inventory ending the year that we did last year, so inventory is building. And again, buyer demand was high even with 8.1% mortgage rates."

"Sellers are adjusting to the new normal," he added. "You can only hold back the life events for so long."

In particular, there are five "D"s, Reffkin explained, that drive supply and bring more homes to the market: diapers, diplomas, diamonds, divorce and death.

So while inventory remains about 39% below 2019 levels, Reffkin said the recent increase is an encouraging sign.

"After a period like 2023 of meaningful contraction, this does suggest 2024 will be modest expansion because more inventory means more sales," he said.