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Financial Capacity Limits Pending Home Sales

According to the latest from the National Association of Realtors (NAR), pending home sales slipped 4.1% month-over-month in March, marking the fifth consecutive months of transaction decreases. Year-over-year, pending home sales dropped 8.2% in March, marking the tenth consecutive month of yearly decreases. 

"The falling contract signings are implying that multiple offers will soon dissipate and be replaced by much calmer and normalized market conditions," said Lawrence Yun, NAR's Chief Economist. "As it stands, the sudden large gains in mortgage rates have reduced the pool of eligible homebuyers, and that has consequently lowered buying activity.” 

"The aspiration to purchase a home remains, but the financial capacity has become a major limiting factor." 

In addition, Yun expects the 30-year fixed mortgage rate to reach 5.3% by the fourth quarter, mortgage rates to average 4.9% in 2022, and to hit 5.4% by 2023. He also expects inflation to hit 8.2% in 2022, although it will start to moderate to 5.5% in the second half of this year. 

As of March 2022, higher mortgage rates and sustained price appreciation has led to a year-over-year increase of 31% in mortgage payments. 

"Overall existing-home sales this year look to be down 9% from the heated pace of last year," said Yun. "Home prices are in no danger of decline on a nationwide basis, but the price gains will steadily decelerate such that the median home price in 2022 will likely be up 8% from last year." 

Renters have also seen monthly payments jump too, leading to more renters exploring homeownership, Yun said. 

"Fast-rising rents will encourage renters to consider buying a home, though higher mortgage rates will present challenges," Yun said. "Strong rent growth nonetheless will lead to a boom in multifamily housing starts, with more than 20% growth this year." 

Yun predicts the unemployment rate will average 3.7% in 2022 and estimates gross domestic product to expand 2.8%. 

With rising mortgage rates, Yun added that single-family homebuilders will be more cautious, despite the current tight inventory conditions, saying "I expect that to result in a boost to construction of less than 5%." 

On a month-over-month basis, the Northeast PHSI grew 4.0% to 89.3, which results in a 9.2% fall on a year-over-year basis. In the Midwest, the index dropped 6.1% last month to 94.7, or 4.8% from last year. 

In the South, pending home sales transactions decreased 0.9% to 125.8, down 9.5% from last year. The index in the West declined 0.2% in March to 89.8, down 8.4% from a year prior. 

"The spring housing market is off to an unpredictable start, mirroring weather patterns in much of the country which have alternated between heat waves and ice storms," noted Realtor.com's Manager of Economic Research George Ratiu. "Markets remain clearly tilted in sellers’ favor due to the shortage of homes and sheer number of buyers still determined to lock in predictable monthly payments as an inflation hedge. However, the economic climate is changing as the Fed moves to stem runaway prices by pulling back on credit availability through higher interest rates. For consumers, the increases in credit card, auto, and mortgage rates are compounding the much higher prices they are paying for gasoline, cars, clothing, food and services. At the end of every month, Americans are finding that there is less money left out of each paycheck. We can expect these factors to lead to fewer transactions in the months ahead, as many first-time buyers find themselves priced out of the market.”

About Author: Kyle G. Horst

Kyle G. Horst is a reporter for DS News and MReport. A graduate of the University of Texas at Tyler, he has worked for a number of daily, weekly, and monthly publications in South Dakota and Texas. With more than 10 years of experience in community journalism, he has won a number of state, national, and international awards for his writing and photography including best newspaper design by the Associated Press Managing Editors Group and the international iPhone photographer of the year by the iPhone Photography Awards. He most recently worked as editor of Community Impact Newspaper covering a number of Dallas-Ft. Worth communities on a hyperlocal level. Contact Kyle G. at [email protected].

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