The housing data looks ugly. How will the market respond? 

With the spring homebuying season fast approaching, economists are watching to see how buyers and sellers react to elevated mortgage rates and the expected volatility in the financial markets.

For anyone anticipating big rate drops in the next month or so, the hotter-than-expected inflation report on Feb. 12 all but quashed those hopes. Other signals, however, suggest that the market could still see some increased activity this spring.

Price cuts may help buyers 'find deals on the margins'

While homebuyers won't be happy with 30-year mortgage rates hanging around 7%, sellers appear more willing to take a lower price. In its latest monthly housing report, Zillow found that nearly 23% of listings received a price cut in January, which the company says is the highest share on record for this time of year.

Altos Research is seeing a similar trend: In response to weaker demand, more sellers reduced prices in the last week of January compared to a year ago — which is "unusual," according to Altos Founder Mike Simonsen.

Sluggish demand is also driving up inventory, which continues to inch closer to pre-pandemic levels as homes linger on the market, according to the latest Redfin report. Supply is at the highest level since 2020, while demand is at a five-year low, the report noted, citing economic uncertainty, a record number of canceled contracts and elevated mortgage rates as key factors.

Will the combination of price cuts and more inventory be enough to rekindle buyer demand as the weather starts to warm up?

"While high rates are frustrating, buyers have a good chance to find deals on the margins," Skylar Olsen, chief economist at Zillow, wrote in the monthly report, adding that buyers had more power to negotiate last month than in any January over the past five years.

What will sellers do? 

Even if buyers come out this spring, will home sellers have the patience to wait for them? An analysis of CoreLogic data by The Wall Street Journal found that nearly 73,000 home listings were pulled in January — the highest monthly total in 10 years.

While the increase in delistings suggests that sellers have been frustrated by slowing demand, they may decide to relist this spring, "even if it means taking a price cut on their listing" or giving up their low mortgage rate, said Olsen.

"Rate lock's hold appears to be losing its grip as homeowners find themselves in a solid financial position and ready to move on," Olsen wrote. "Home equity is near record highs and the general economy and financial markets are surprisingly strong."

Mortgage rates fall for a fourth consecutive week

The 30-year fixed-rate mortgage dipped slightly in the past week, according to Freddie Mac. Rates averaged 6.87%, down from 6.89% the week before. The 15-year rate moved up, however.

The weekly decline in 30-year rates largely preceded the release of new CPI data on Feb. 12 — which showed that inflation went up last month — so mortgage rates aren't expected to fall significantly in the coming weeks. Still, the recent downward trend has given mortgage applications a small boost, according to the Mortgage Bankers Association. The unadjusted purchase index increased 4% from the week before and 2% year-over-year, and refinance applications also rebounded, jumping 10% compared to the previous week.

But "mortgage rates could be volatile in the weeks ahead, which could set us up for an unpredictable spring housing market," said Lisa Sturtevant, chief economist at Bright MLS. "There is significant pent-up demand in the market. However, potential headwinds include rising inflation and economic uncertainty."

Mortgage News Daily, which uses a different set of criteria to determine average mortgage rates, reported that the 30-year rate rose to 7.13% immediately following the CPI report but dropped to 7.04% on Feb. 13.