Sooner or later, higher mortgage rates (which are keyed off of the 10-year treasury yield) were always bound to start slowing the housing market. It was more a matter of what level of rates would be necessary to take the first bites out of housing. We think the answer is playing out right in front of us. With mortgage rates recently breaching the highest level since 2011, housing data has been coming in on the weak side all year long, and may be set to get even worse in the coming months. Let’s explain.

In the first chart below we show pending home sales (blue line, left axis) overlaid on the 30 year fixed mortgage rate (red line, right axis, inverted, leading by 2 quarters). As we can see, pending home sales are closely inversely related to the level of mortgage rates, and rates lead pending home sales by about two quarters. The breakout in mortgage rates we’ve seen over the last few months portend more weakness in pending sales.

The next chart compares mortgage applications (blue line, left axis) to the 30 year fixed mortgage rate (red line, right axis, inverted) and shows that these two series are also closely inversely related. Higher rates are slowing demand for financing and demand for overall housing. Not exactly a heroic observation, but an important one nonetheless.