Purchase demand remained subdued in August, even though the month’s decline in mortgage rates pulled home affordability to its best level in six months, according to the latest Mortgage Monitor Report from Intercontinental Exchange (ICE).

But according to Andy Walden, the company’s vice president of research and analysis, that might not necessarily be so bad.

With 30-year conforming mortgage rates down 60 basis points from May (when they peaked at just over 7%), the monthly principal and interest payment on an average-priced home purchase is $145 less than it was just three months ago. Three of the 100 largest markets in the country — Birmingham, Alabama; Des Moines, Iowa; and McAllen, Texas — are back to their long-run affordability averages, per ICE data. Cleveland; Memphis; Toledo, Ohio; and Baton Rouge, Louisiana, are within one percentage point. Another 22 markets are within five.

Purchase demand saw somewhat of an August bump, seeing two of its best weeks since March, per ICE’s metrics. Those metrics, however, remain well below levels from earlier this year and last year, when rates were at similar levels.

A large part of the weakness, Walden noted, is that affordability remains significantly strained despite recent improvements.

“When it comes to affordability, as always, context is important: it still takes 10 percentage points more of the median income to buy the average house than it has on average over the last 30 years,” Walden said. “Our own ICE Market Trends data shows that prospective homebuyers are also facing record high down payments and credit scores among recent purchase mortgages. Affordability is still very much a challenge and that is likely to continue for the foreseeable future, but August’s improvement is certainly welcome progress.

“Even as affordability challenges persist,” Walden continued, “purchase demand perked up on August’s rate drops, hinting at a population of prospective homebuyers poised and ready to act as soon as market movements tip the affordability math in their favor. August’s demand remains muted from earlier this year and last, when interest rates were at comparable levels, but that may well turn out to be a good thing on balance.”

A gradual simmering of the market, rather than an all-out firestorm, may prevent a housing market already contending with affordability struggles from further overheating, Walden explained. It may also be good for the Federal Reserve’s mandate to get prices under control.

“The market today is in a good position from the perspective of the Fed and its mission,” he said. “Slower home growth is a positive sign in the Fed’s fight against inflation and increased — but still mild — demand is good for the market and Fed alike.”

Indeed, prices cooled further in July, ICE noted, with the annual growth rate abating to 3.6% from 4.1% one month prior. On a seasonally adjusted basis, prices were up 0.19% in July, equating to a seasonally adjusted annual pace of 2.3%.

Growing inventory driven by tepid demand is fueling stronger price deceleration — and even price drops — in some areas. In Florida, for example, home prices in the nine largest markets have all dropped by at least 0.25% month over month in July; Cape Coral saw the largest backtrack, with prices sliding a full percentage point.

“Florida is not alone,” Walden added. “Other areas where inventory has returned to or exceeded pre-pandemic norms also saw prices edge lower in July. Places like Austin, San Antonio, Memphis, New Orleans and San Francisco. On the other side of that coin, inventory shortages persist in many parts of the Midwest and Northeast, where prices continue to push higher. Just look at Cleveland, Providence, Richmond and Chicago, which – along with Seattle – made up the top five performing metros in July from a home price growth perspective.”

Walden did caution that while there are silver linings to current market trends, there are risks to the fact that recent inventory improvement has come chiefly by way of soft demand rather than homeowners listing properties.

“This makes supply – and its follow-on effect on home prices – sensitive to rate changes, making demand worth watching closely,” he said. “Without a meaningful return in new listing volumes, the market is reliant on weak demand to allow inventory to grow, limiting the prospect of stronger sales activity without a corresponding risk of inventory drawdowns.”