Homebuyers across the country are slowing down their purchasing activity as rising mortgage rates eat away at their buying power. According to the National Association of Realtors, pending home sales for August plummeted 7.1% from the previous month, a significant drop from July’s 0.9% increase. The decline was more severe than the estimated 1.0% decline by Bloomberg economists and was observed in every region of the country. On a yearly basis, pending transactions were down by a staggering 18.7%.
This decline in home sales underscores the negative impact of expensive mortgages, rising home prices, and limited inventory on the housing market. Experts also attribute some of the decline to seasonal factors. Lawrence Yun, NAR chief economist, explains, “Mortgage rates have been rising above 7% since August, which has diminished the pool of homebuyers. Some would-be home buyers are taking a pause and readjusting their expectations about the location and type of home to better fit their budgets.”
In terms of regional performance, the Northeast experienced a 0.9% decline in contract signings from the previous month and an 18.2% decrease from August 2022 levels. The Midwest witnessed a 7.0% decrease in pending sales and a 19.1% drop compared to the previous year. The South recorded a monthly dive of 9.1% in pending sales and a 17.6% decline year-over-year. Lastly, the West saw a 7.7% decline in activity and a 21.4% decrease from August 2022.
Orphe Divounguy, senior economist at Zillow, states, “The drop in pending home sales is due to a combination of higher mortgage rates and seasonal factors, with sales typically falling this time of year. The recent increases in rates have lowered mortgage demand and housing supply.”
The average rate on a 30-year fixed mortgage hit 7.23% in August, the highest rate since June 2001. These elevated rates have deterred homeowners from selling their properties, leading to a shortage of options in the resale market. Mortgage loan applications for purchases dropped 2% from the previous week on a seasonally adjusted basis, with a 27% decrease compared to last year.
Even the new home market, which relied on the lack of resale stock, experienced a slowdown. Sales of newly built homes declined by 8.7% in August, with a seasonally adjusted rate of 675,000 units, according to the Census Bureau.
The shortage of available homes has incentivized builders to step in and replenish housing supply, offering various incentives to attract buyers. However, these efforts are limited by the rising borrowing costs. Yun emphasizes the need for increased housing inventory and better interest rates to revive the housing market.
Unfortunately, it is unlikely that mortgage rates will decrease significantly in the near future. Federal Reserve Chair Jerome Powell recently hinted at raising the benchmark interest rate again and maintaining higher rates if inflation does not decrease. Yun even suggests the possibility of rates reaching 8% in the short run.
As the housing market continues to face challenges, prospective homebuyers are left with limited options and decreased purchasing power. It remains to be seen how the market will perform in the coming months and if measures will be taken to address these issues.