December Pending Home Sales Plummet as Mortgage Rates Exceed 7%
In a surprising turn of events, signed contracts on existing homes took a steep nosedive in December, plummeting by 5.5% from the previous month and 5% from the prior year. This data, released by the National Association of Realtors, marks a significant shift from the four consecutive months of gains that preceded it, plunging the index to its lowest level since August.
These so-called pending sales serve as a strong indicator of future closings and provide the most current snapshot of market activity. However, December buyers found themselves grappling with a notable spike in mortgage interest rates, which likely contributed to the decline in demand. The average rate on a 30-year fixed mortgage soared from a low of 6.68% on December 6 to a staggering high of 7.14% on December 19.
Realtors had previously noted that buyers were adapting to a “new normal” of higher interest rates, but the psychological threshold of 7% seemed to deter many prospective buyers. While sales of newly built homes saw gains in December, thanks in part to homebuilders aggressively reducing mortgage rates to entice customers, pending sales across all regions experienced a decline.
The Regional Impact
The West and Northeast regions bore the brunt of the monthly drop in pending sales, with decreases of 8.1% and 10.3%, respectively. These areas, known for their high home prices, felt the squeeze of elevated mortgage rates, which significantly impacted affordability for potential buyers.
Lawrence Yun, chief economist for the National Association of Realtors, highlighted the regional disparity, stating, “Contract activity fell more sharply in the high-priced regions of the Northeast and West, where elevated mortgage rates have appreciably cut affordability. Job gains tend to have a greater impact in more affordable regions.” He also noted that unusual winter precipitation may have influenced the timing of home purchases.
The Ongoing Challenges
Despite the drop in pending home sales, home prices continued their stubborn ascent across the nation, with annual gains accelerating in late fall and early winter. The latest data from the S&P Case-Shiller national home price index revealed this trend, underscoring the persistent challenge of affordability in the housing market.
As we entered January, the outlook for homebuying demand remained bleak. Mortgage applications for home purchases were down by 7% compared to the same week a year earlier, according to the Mortgage Bankers Association. Concurrently, homes were languishing on the market for extended periods, with the average listing taking 54 days to secure an offer, the lengthiest timeframe since March 2020.
Adding to the complexity of the situation, the supply of homes for sale surged significantly, with a 37% increase in newly listed homes in January compared to December. Danielle Hale, chief economist at Realtor.com, interpreted this shift as a potential turning point in the standoff between buyers and sellers induced by high mortgage rates. However, she cautioned that the uptick could be a fleeting result of the lower mortgage rates observed in the fall.
As the housing market grapples with fluctuating mortgage rates, affordability challenges, and shifting buyer-seller dynamics, the road ahead remains uncertain. The delicate balance between supply, demand, and pricing will continue to shape the landscape for prospective homebuyers and sellers in the coming months.
