Research Note: Mortgage Rate as a MOTIVATOR & DETERRENT

After peaking during the week which ended on May 2, 2021, new development contract volume spent the remainder of the year trending downwards towards its pre-COVID long-term average, as indicated by the perforated trendline in the graph below. During that same period, mortgage rates held relatively steady at historically low levels:

However, when mortgage rates began to rise sharply during the first few weeks of 2022, waning contract volume reversed course abruptly and accelerated once again, as illustrated by the graph on the following page. Rising rates increased demand by pulling into the market would-be future purchasers hoping to lock in rates before the monthly principal and interest payments became too large a financial strain. The rate that appears to have catalyzed this demand, i.e. motivated the market, is 3.56%.

After increasing rapidly throughout Q1–2022, mortgage rates eventually reached another level — one we refer to as the “deterrent threshold” — and buyers appear to have headed for the sidelines as those monthly payments exceeded affordability. As indicated within the graph, an interest rate of 4.72% effectively pushed out the demand that rising rates pulled in.

It is important to note that the mortgage rate transitioned from motivator to deterrent in only 11-weeks.

It will be interesting to watch whether or not this inversely proportional relationship continues, i.e., if new development contract volume maintains its decline as mortgage rate continues its ascent.