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Economic Report: Pending home sales decline for 4th consecutive month, as interest rates rise: ‘Many people looking for a home have hit a ceiling’

The numbers: Pending home sales slid 4.1% in February, according to the monthly index released by the National Association of Realtors. The index reflects transactions where the contract has been signed for an existing-home sale, but the sale has not yet closed. Economists view it as an indicator for the direction of existing-home sales in subsequent months.

With February’s decline, the index has fallen to the lowest level in nearly two years.

Key details: Compared to a year earlier, pending home sales were down 5.4%. February was the fourth consecutive month in which pending sales declined on a monthly basis and the ninth consecutive month in which contract signings were down year-over-year.

On a regional basis, sales were down in every region except the Northeast, where contract signings increased nearly 2% between January and February. The largest decline occurred in the Midwest, where the index measuring contract-signing activity declined 6%.

The big picture: Lawrence Yun, chief economist for the National Association of Realtors, attributed the index’s decrease in February to the low supply of homes listed for sale. “Buyer demand is still intense, but it’s as simple as ‘one cannot buy what is not for sale,’” he said, adding that he expects a 7% drop in home sales in 2022 versus the year prior.

However, the rapid increase in mortgage rates is creating another major challenge for buyers as the spring home-buying season kicks in. Over the past two weeks, mortgage rates have risen at the fastest pace in a decade. With home prices already at record highs across much of the country, the combination is straining households’ budgets.

Economists expect that the increase in interest rates will cause the market to cool, which could slow the fast pace of home-price growth seen over the past couple of years.

Looking ahead: “While sales are well off their late-2020 high, they remain above pre-COVID norms,” said Robert Kavcic, senior economist at BMO Capital Markets, in a research note.

“With mortgage rates moving toward 5%, we are seeing early signs of a shift in housing fundamentals, as many people looking for a home have hit a ceiling on their ability to afford a home,” said George Ratiu, manager of economic research at Realtor.com.

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