According to the latest data from the National Association of Realtors (NAR), pending home sales slid 7.1% in August, as all four U.S. regions posted monthly losses, and year-over-year declines in transactions.
"Mortgage rates have been rising above 7% since August, which has diminished the pool of home buyers," said Lawrence Yun, NAR Chief Economist. "Some would-be home buyers are taking a pause and readjusting their expectations about the location and type of home to better fit their budgets."
NAR’s Pending Home Sales Index (PHSI) is a forward-looking indicator of home sales based on contract signings which sank 7.1% to 71.8 in August. Year-over-year, pending transactions fell by 18.7%. An PHSI reading of 100 is equal to the level of contract activity in 2001.
"It's clear that increased housing inventory and better interest rates are essential to revive the housing market," noted Yun.
Regionally, the Northeast PHSI declined 0.9% from last month to 62.6, and a reduction of 18.2% from August 2022. The Midwest index dropped 7% to 71.3 in August, down 19.1% from one year ago. The South PHSI fell 9.1% to 86.5 in August, dipping 17.6% from the prior year, while the West index retreated 7.7% in August to 56.3, sinking 21.4% from August 2022.
“Pending home sales generally leads existing-home sales by a month or two, so home sales are likely to remain close to the annualized rate of four million through the fall,” noted First American Deputy Chief Economist Odeta Kushi. “The last time we went below four million was in the depths of the Great Financial Crisis between July and October 2010. Higher mortgage rates are to blame for the weakness in home sales.”
According to NAR, pending contracts are good early indicators of upcoming sales closings. However, the amount of time between pending contracts and completed sales is not identical for all home sales. Variations in the length of the process from pending contract to closed sale can be caused by issues such as buyer difficulties with obtaining mortgage financing, home inspection problems, or appraisal issues.
"The Federal Reserve must consider the sharply decelerating rent growth in its consideration of future monetary policy,” added Yun. “There is no need to raise interest rates. Moreover, the government shutdown will disrupt some home sales in the short run due to the lack of flood insurance, or delays in government-backed mortgage issuance.”
As Yun mentioned, Realtor.com’s Monthly Rental Report for August found that median rents for 0-2 bedroom units declined consistently year-over-year for the past four months which, when combined with mortgage rates hovering above 7% and a low enough supply to drive up prices despite subdued demand, tipped the scales in favor of renting. In August, homeownership costs exceeded renters' monthly costs by nearly $300 compared with the start of the year.
Realtor.com found that August marked the fourth month of year-over-year rent declines in a row for 0-2 bedroom properties, which overall are down -0.6% year-over-year. Rents dropped -0.7% for 2-bedrooms, -0.5% for 1-bedrooms, and -0.2% for studios. Specifically, the median asking rent in the 50 largest metros dipped to $1,752, down $7 from last month and down $25 from the peak in July 2022. However, median rents remain $336 (23.7%) higher than the same time in 2019, prior to the pandemic.
“Today’s home shoppers face considerable affordability headwinds, but many are planning a home purchase nonetheless,” said Realtor.com Senior Economic Research Analyst Hannah Jones. “Even in a challenging market, housing market conditions typically line up for buyers in the early fall. For interested shoppers who need to and are able to participate in today’s market, we have found that the week of October 1-7 represents the best combination of housing market factors for buyers. The early fall market typically benefits from a build up in inventory left over from the summer as buyer demand fades, as well as below-peak prices. We have seen this shift in the last few weeks as the annual gap in active listings continues to narrow and prices remain below the year’s peak. Buyers should get to know their local market by spending time looking at their desired area on Realtor.com and saving a search so they are notified of every home that fits their criteria as soon as it hits the market.”
As Jones notes, Realtor.com predicts that during the week of October 1, approximately 4.2 million homes will change hands according to its “Best Time to Buy” report which identifies key factors people use when considering buying a home, mortgage rates withstanding. Realtor.com has predicted that the homebuying stars will dramatically align during the week of October 1, meaning those in the market should view this week as a window of opportunity to make the most of their purchasing power. Early Fall offers buyers the most favorable moment to buy compared to the remainder of the year as that week typically has more listings, less competition, and lower prices.
Realtor.com predicts the week of October 1 will offer:
- Up to 17% more active listings than at the start of the year
- Savings of more than $15,000 relative to the summer's peak price of $445,000
- More time to decide as homes are expected to stay on the market for one week longer than during this year's peak
- Less competition with demand expected to be 18.7% lower than peak buying periods