In August, National Association of REALTORS® (NAR) Chief Economist Lawrence Yun expressed optimism that the declining housing market had reached its floor, or at least some kind of normalization, as pending home sales fell only fractionally after several months of overall decline.
But that hope seems to be fading, as the latest data shows a significant deceleration in contract signings, which sank 10.2% in September.
“Persistent inflation has proven quite harmful to the housing market,” said Yun in a statement. “The Federal Reserve has had to drastically raise interest rates to quell inflation, which has resulted in far fewer buyers and even fewer sellers.”
As a leading indicator, the data is potentially a bad sign for the upcoming winter months, when real estate activity is already depressed across much of the country. Existing-home sales also saw historic declines in the last couple months, and homebuilder sentiment—another leading indicator for the real estate market—fell every single month this year.
“NAR’s pending home sales data is a reliable predictor of closed sales in the following two months. Therefore, we should expect home sales to continue to contract throughout the end of the year. But where is the bottom?” asked Dr. Lisa Sturtevant, Bright MLS chief economist. “The combination of sagging demand and limited inventory means that home sales activity will continue to drop off during the last quarter of the year.”
Mortgage rates continue to be the driving force behind the overall sluggish market, as Freddie Mac reported the 30-year fixed broke 7% this week. Yun warned that this higher rate environment is not transitory.
“The new normal for mortgage rates could be around 7% for a while,” he predicted. “On a $300,000 loan, that translates to a typical monthly mortgage payment of nearly $2,000 compared to $1,265 just one year ago—a difference of more than $700 per month. Only when inflation is tamed will mortgage rates retreat and boost home purchasing power for buyers.”
Sturtevant agreed, adding that this year’s sales are not just falling below last year’s inflated numbers, but will likely sink to near-decade lows.
“In September, existing-home sales hit its lowest level in a decade, aside from April and May 2020,” she said. “Overall, total home sales for 2022 will be down significantly from last year, likely hitting a level not seen since 2014.”
In another worrisome indicator, pending sales fell across every region after late-summer data showed contracts were actually up on a month-to-month basis in the West. The South remains the closest to what NAR defines as a “normal” level of contract signings (tied to the average level of activity in 2001), while the West has now fallen the furthest from that baseline.
Northeast
-16.2% MoM
-30.1% YoY
Midwest
-8.8% MoM
-26.7% YoY
South
-8.1 % MoM
-30% YoY
West
-11.7% MoM
-38.7% YoY
