Pending home sales in February dipped for the fourth straight month as depleted inventory and rising mortgage rates dampened sales.
The number of contracts signed for homes dropped 4.1% in February, following a 5.7% decline in January, according to data from the National Association of Realtors released on Friday.
The pending home sales index was back to its 2019 average, before the pandemic, despite strong housing demand.
The supply of new houses still hasn’t been able to catch up with demand even when housing starts and permits have been rising. It will take some time for those to come online, while the supply of existing houses has continued to be chipped away since the market first ran hot in late 2020.
Market conditions are changing fast as headwinds continue. Rising mortgage rates are slowing down housing demand, which has already been hampered by elevated prices. The spillover of continuing rate hikes might also pause builders’ plans to provide more new houses, especially as uncertainties remain.
Persistent labor shortages are also causing supply issues, while rising material costs eat into builders’ profit margins.
Because about 80% of pending home sales will become actual sales within two months, we expect that sales of existing homes will trend down in the next two months as well.
What has become clear is that the housing market this year will cool down significantly as the Federal Reserve, seeking to tame inflation, embarks on interest rate increases for the first time since the pandemic.