Pending home sales data startles to the upside in January; Refinancing down 72% YoY

The National Association of Realtors released its Pending Home Sales Index (PHSI) for January 2023 and registered a rise of 8.1% MoM to settle at 82.5, the biggest monthly increase since June 2020.

This increase was highly unexpected with the Wall Street Journal noting that market estimates were around 0.9%.

Since financial markets expected the Federal Reserve to ease to the traditional 25 bps hikes, buyer sentiment improved in December 2022 and January 2023, as mortgage rates headed meaningfully lower.

Source: FRED Database

As per Freddie Mac, mortgage rates peaked at 7.08% in November 2022 before declining to as low as 6.09% at the beginning of February 2023.

This decline drove affordability and led the PHSI higher for a second consecutive month.

As a leading indicator of the housing market, the improvement in pending home sales is a positive development at least in the near term.  

On an annual basis, the index declined for a twentieth straight month, coming in at -24.1%.

This was an improvement over the previous four months which saw reductions between -29.8% and -36.8% on an annual basis.

Source: National Association of Realtors

Affordability won’t last

It appears that inflationary pressures have already begun building up again in the system.

January indicators including the CPI, PPI and PCE show that inflation is sticky, particularly the shelter component.

Source: Bureau of Labor Statistics; Bureau of Economic Analysis

With expectations that the Fed will have to continue to be aggressive in their March meeting, 30-year mortgage rates have been shifting up, reaching 6.50% as per Freddie Mac on 23rd February 2023.

As per Mortgage News Daily, these were 6.88% as of 24th February 2023.

The Mortgage Bankers Association reported that in the week ending February 17th, mortgage applications had shrunk by 13.3%, reflecting an unwillingness to invest in a home.

Refinancing activity was hard hit coming in at 72% lower than the same week twelve months ago.

Joel Kan, the Vice President and Deputy Chief Economist of the Mortgage Bankers Association noted,

This time of the year is typically when purchase activity ramps up but over the past two weeks…The increase in mortgage rates has put many homebuyers back on the sidelines once again, especially first-time homebuyers.

Sales activity is likely to be weak going forward due to limited supplies with the Census Department reporting that only 15.5% of the homes officially available for sale have been completed, and 20.7% are yet to be started.

Further, existing sales data has been revised downwards by huge margins in the past few months suggesting added weakness in the market.

Crucially, mortgage rates should head higher in the coming months, as the Fed is forced to respond aggressively to rising inflationary pressure.

This article on Invezz discusses the turnaround in inflationary pressures that the US is facing this month.

If this were to materialize, home sales will likely begin to fall at a steeper rate while investors will closely watch next month’s pending home sales data as an advance indicator of the health of the residential market.

On a positive note, all four regions in the US saw an improvement in pending home sales, rising between 6% in the Northeast and 10.1% in the West.