Pending home sales in April dropped more than expected as mortgage rates climbed toward a multidecade high, the National Association of Realtors reported on Thursday.
April’s pending sales index fell by 3.9% on the month, following an upwardly revised 1.6% decline in March. That pushed the total decline of the index to 16.8% for the first four months of the year.
Excluding May and June 2020—the onset of the pandemic—last month’s pending home sales were the lowest since 2014.
About 80% of pending sales will become existing sales within two months. We should expect existing home sales to fall further, most likely to around the pre-pandemic level in 2019. April’s existing home sales fell by 2.4%, according to recent report from the NAR.
The sharp drop in home sales does not mean that prices will come down as fast. Rising material costs and persistent labor shortages have kept prices elevated. Both are unlikely to go away soon.
But there is one bright spot: The 30-year mortgage rates have dropped in the past two weeks to 5.1% from May’s high of 5.3%, the largest decline in more than two years. That was a reaction to the Federal Reserve’s slightly less hawkish tone this week as the potential for a rate hike pause in September might come into play because of concerns over slow economic growth.
The two 50-basis point rate increases in June and July have most likely been priced into the recent steep rise in mortgage rates.
There is more room for demand for housing to fall as a result of higher mortgage rates, but if rates stabilize—which will depend heavily on the Fed’s decision—we should expect the volatility in the housing market to end as both demand and supply moderate.