Pending homes fell 8.6% in June, as the twin tolls of high prices and rising mortgage rates saw the once-hot housing market chill, the National Association of Realtors reported on Wednesday.
Sales are now down 20% from last year. Sales fell in all four regions of the country, with the west experiencing the sharpest drop.
The report is the latest evidence that a key sector of the economy is slowing quickly as the Federal Reserve raises interest rates and the economy buckles under the strain of higher borrowing costs and rampant inflation.
“Contract signings to buy a home will keep tumbling down as long as mortgage rates keep climbing, as has happened this year to date,” said NAR Chief Economist Lawrence Yun. “There are indications that mortgage rates may be topping or very close to a cyclical high in July. If so, pending contracts should also begin to stabilize.”
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Sales increased in May after six months of declines as buyers rushed to take advantage of increased inventories of homes and a brief dip in mortgage rates. But that now looks to be reversing.
Pending home sales are considered a leading indicator for the housing sector, as homes generally take 30 to 60 days to close after a contract is signed. Sales of new and existing homes have fallen in recent months as higher prices and rising mortgage rates have made houses less affordable.
“Real estate markets are reflecting economic tensions, between rising expectations of a recession and a stable labor market that is offering workers the benefits of rising wages,” George Ratiu, senior economist and manager of economic research at Realtor.com, said ahead of the report on Tuesday.
“With the Federal Reserve committed to bringing inflation down from June’s 9.1% by hiking short-term interest rates, markets expect borrowing costs to continue on an upward trend,” Ratiu added, “Higher prices are leaving less money in consumers’ wallets each month, and for homebuyers to put toward a typical mortgage payment. The affordability crunch is the main concern for many families this summer.”
On Tuesday, the Commerce Department reported that sales of new homes fell to their lowest level since the pandemic, dropping 8.1% in June from May. There are reports that builders are discounting homes and offering incentives to move their inventory.
“The inventory of new homes has risen to a 9.3-month supply at the current sales pace, which is the highest it has been since May 2010,” Wells Fargo economists noted on Tuesday.
“Builders have responded by reducing prices and offering incentives to buy down mortgage rates,” the bank added. “The median price of a new home sold in June was $402,400, which is down more than $40,000 from the prior month on a non-seasonally adjusted basis and marks the second consecutive month prices have fallen. The median sale price is now 7.4% above its year ago level.”
A slowdown in housing could have ripple effects across the economy. Housing has been one of the strongest sectors since the coronavirus struck in March of 2020. With many businesses and establishments closed during the early days of the pandemic, Americans rushed to buy houses and renovate their existing ones. This, in turn, led to increased purchases of related items like patio furniture, exercise equipment and new appliances. That, however, drove prices much higher and led to shortages of key commodities, setting off the inflation that now bedevils the economy.
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