Despite growth in both mortgage rates and home prices, housing demand kicked off 2018 with its strongest January on record, according to Redfin's Housing Demand Index.

The index was up 4.8% to 130.5 year-over-year in January, and increased 0.5% from the previous month.

The rise in housing demand this year could be a sign that prospective homebuyers are anticipating further growth in mortgage rates, which are predicted to near 5% by the end of the year, according to industry experts. This may pave the way for an even more competitive homebuying season ahead, at a time when potential buyers are already plagued by tight supply and home price appreciation.

Housing demand

"Inventory has been deteriorating for more than two years, yet 2018 started off with buyer demand stronger than in any previous January we've measured," said Redfin Chief Economist Nela Richardson in a press release.

"Along with inventory declines, buyers contended with rising mortgage rates, an overhaul of the tax code and a jumpy stock market. However, strong local labor markets helped keep buyers enthusiastic about homeownership despite headwinds," she continued.

While housing demand is up, inventory fell 19.9% from a year ago, the greatest drop since at least 2014. January marked the 32nd consecutive month of declining housing inventory.

The number of homebuyers requesting tours grew 13.7% in January from the previous year, but 9.7% fewer buyers are making offers. This could be a result of homes becoming less affordable, as one-in-five homes are already selling above the asking price.

Redfin's Housing Demand Index is based on customers requesting home tours and writing offers, and has been adjusted for market share growth. A level of 100 represents the historical average of the three-year period between January 2013 and December 2015.

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