As the last wave of COVID receded in September, pending home sales fell 2.3% from a month ago and fell below last year’s levels for the fourth month in a row. Pending home sales precede closings and are therefore a strong indicator of home sales activity over the next few months. The rise in mortgage rates from 2.87% at the start of the month to 3.01% at the end may have caught some buyers off guard. Contract signings fell in all 4 regions, with the largest declines in the Midwest and Northeast. Despite the slide, national and regional indices outside the Northeast recorded their 2nd or 3rd highest levels of the year. Although home sales activity has retreated from earlier highs, it is roughly stabilizing at a level of activity above the pre-pandemic pace thanks to a combination of eager young buyers, savings persistent pandemic and low mortgage rates creating opportunities despite current house price gains and rising mortgage rates.
What this means for the housing market:
Whether the housing market will maintain this plateau and begin to grow again or decline depends on how the economy plays out, with home construction and income growth serving as the main wild cards. Rising home prices will be the norm as long as demand exceeds supply, and with a cumulative shortage of 5.2 million homes over the past decade and many millennials are entering the age of buying a home, the stage is set for this imbalance to continue. If automakers continue to ramp up production, as they have been doing, it could help stem price growth to a pace more consistent with rising incomes. Alternatively, as rising house prices are accompanied by rising mortgage rates, which have already jumped above 3%, we could see mortgage payments that require a larger share of the buyer’s paychecks, especially if income increases more slowly. This could cause some buyers to pull back, which would dampen demand and ultimately slow sales activity and home price growth.