U.S. pending home sales fall to lowest level on record
A leading indicator of the U.S. housing market dropped to its lowest level on record in July, as housing affordability constraints kept buyers on the sidelines for another month.
According to the National Association of Realtors (NAR), pending home sales declined 5.5% in July, reaching the lowest level since the data series began in 2001.
The decline was unexpected, with economists in a Wall Street Journal survey calling for a slight uptick from June.
Contract signings were down across all four major U.S. regions. Nationwide transactions were 8.5% lower compared to a year earlier.
NAR chief economist Lawrence Yun said the housing market has been weaker than expected, adding that “A sales recovery did not occur in midsummer.”
“The positive impact of job growth and higher inventory could not overcome affordability challenges and some degree of wait-and-see related to the upcoming U.S. presidential election,” said Yun.
Nevertheless, Yun predicted that “Falling mortgage rates will no doubt bring buyers back into [the] market.”
Mortgage costs have fallen to 16-month lows on expectations that the Federal Reserve will begin lowering interest rates in September. According to the latest Freddie Mac data, average 30-year rates were 6.46% as of last week, down from nearly 7% at the beginning of July.
Experts say mortgage rates need to fall much faster for a meaningful housing recovery to be possible.
Rates are still too high
Economists and real estate agents generally agree that mortgage rates would need to fall to the low 5% range for there to be a meaningful uptick in housing demand. According to Moody’s Nick Villa, a sustained drop below 5.25% would likely be enough to encourage more homeowners to list their properties.
Blakely Minton, a Redfin Premier real estate agent, says he has more than a dozen homeowners who want to sell their properties, but aren’t willing to give up their 3% mortgage rate for one that’s more than twice as high.
Recent forecasts from the NAR, Mortgage Bankers Association, and Freddie Mac suggest it could take years for rates to reach 5%. In the meantime, home prices are expected to continue rising, putting additional pressure on affordability.
“Housing affordability remains a meaningful problem,” said Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management.
“Potential homebuyers are being priced out of the market, or they need to save up more to make a larger down payment to keep their mortgage payment reasonable,” he said.
Even after the most recent drop in mortgage rates, homebuyers would still be on the hook for monthly payments of more than $2,600, assuming a 20% down payment on an average home, based on Zillow’s mortgage calculator.
In addition to costly mortgage expenses, homebuyers also face higher insurance, taxes, and utility costs.