Homebuyers across the country pulled out of the market at the start of fall as rising mortgage rates eroded their purchasing power.
Pending Home Sales According to the National Association of Realtors, August’s reading fell 7.1% month-over-month, compared to July’s 0.9% monthly increase. The result was far worse than the 1.0% decline estimated by Bloomberg economists and was widely reported. Each region experienced a monthly and annual decline.
Annual outstanding transactions fell by 18.7%.
The decline in the index, a leading indicator of the health of the real estate market, further highlights how real estate activity has been stifled by expensive mortgages, rising prices and low inventory levels. Seasonality may also have played a role.
“Since August, mortgage rates have risen above 7%, reducing the number of homebuyers,” NAR chief economist Lawrence Yun said in a statement. “Some potential homebuyers are pausing and adjusting their expectations of location and type of home to better fit their budget.”
Signings in the Northeast were down 0.9% month-over-month and down 18.2% compared to August 2022. Pending sales also fell by 7.0% in the Midwest and fell 19.1% compared to the previous year.
The South saw a 9.1% monthly decline in pending sales in August, while it also fell 17.6% year-on-year. Activity in the West fell 7.7%, down 21.4% from August 2022.
“The decline in pending home sales is due to a combination of higher mortgage rates and seasonal factors, with sales typically declining this time of year and recent interest rate increases having reduced mortgage demand and housing supply,” Orphe Divounguy, senior economist at Zillow, told Yahoo Finance.
Increased mortgage rates have created a one-two punch on supply and demand.
Higher interest rates have removed the incentive for homeowners to sell their homes and left buyers with few options in the resale market.
The story goes on
“Buyers simply cannot buy what is not for sale,” Divounguy said.
According to Freddie Mac, the average interest rate on the 30-year fixed mortgage rose to 7.23% in August, the highest rate since June 2001, when rates were at 7.24%. Prices have been above 7% for six straight weeks, limiting affordability. The latest interest rate data will be released on Thursday at noon EDT.
Higher mortgage rates have also hurt demand as many buyers were put off by sticker shock.
For example, mortgage loan applications for purchases fell a seasonally adjusted 2% from the previous week, according to data from the Mortgage Bankers Association (MBA) for the week ended September 22. Unadjusted, the index measuring purchase requests was 27% lower than a year ago.
The rise in borrowing costs is even weighing on the new home market, which had been buoyed by a lack of resale inventory for most of the year. According to the latest data from the Census Bureau, sales of newly built homes fell 8.7% in August to a seasonally adjusted rate of 675,000 units.
“Sales levels showed some effect of elevated mortgage rates on housing demand,” wrote Colin Johanson, U.S. macroeconomic research analyst at Barclays, in a note following new home sales results. “The decline can also be attributed to the sharp decline seen in the August housing starts release last week, as many new home sales are sold before or during the start of construction, putting some downward pressure on today’s new home sales release leads.”
A “For Sale” sign is posted outside a home for sale in San Marino, California, on September 6, 2023. (Photo by FREDERIC J. BROWN/AFP via Getty Images)
The lean inventory in the market has allowed builders to step in and replenish the housing supply by offering various incentives to attract potential buyers to the newly built home market. But only so much demand can move inventory if borrowing costs continue to rise.
“It is clear that larger housing inventory and better interest rates are essential to revitalizing the housing market,” Yun said.
But it’s also unlikely that mortgage rates will fall significantly in the near future. Federal Reserve Chairman Jerome Powell said last week that the central bank could raise its key interest rate again this year and likely leave it at higher levels if inflation does not return toward its 2% target.
This prompted Yun to sound the alarm on mortgage rates last week.
“In the short term, it is possible that interest rates could rise to as high as 8%,” Yun said.
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.
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