Pending Home Sales Plunge To Lowest Level In Nearly A Decade—Worst Could Be Yet To Come

Topline

Pending home sales slid for the sixth consecutive month in April to the lowest level in nearly a decade, according to Tuesday data, and experts believe sales have much more room to fall as rising mortgage rates put a damper on a booming housing market.

Key Facts

The National Association of Realtors’ pending home sales index, which measures home sales based on contract signings, fell 3.9% to 99.3 in April, with transactions falling 9.1% year over year, according to a Thursday release.

With the Federal Reserve hiking interest rates twice this spring, escalating mortgage rates are starting to curb home buying demand, NAR chief economist Lawrence Yun said in a statement, pointing out higher rates have added as much as $500 to monthly mortgage payments.

Yun expects existing-home sales will fall 9% this year, but if mortgage rates climb to 6% from a current level of roughly 5.3%, he says sales activity could plunge by 15%.

Meanwhile, Yun says home prices “appear in no danger of any meaningful decline” given an ongoing housing shortage and swift selling, with listed homes generally seeing a contract signed within one month.

Of the potential implications, Pantheon Macro chief economist Ian Shepherdson said in a Thursday report that plunging sales will be followed by a “a serious downshift” in retail sales of building materials, furniture and appliances.

“That won’t break the overall economy,” Shepherdson notes, though he cautions home builders, materials suppliers and retailers of housing-sensitive items—whose stocks skyrocketed amid a pandemic-era housing boom—“are going to suffer.”

Key Background

Historically high savings rates and unprecedented government stimulus efforts and low interest rates helped ignite a home buying frenzy during the pandemic, but signs of a slowdown have quickly emerged as the Fed embarks on its most aggressive interest-rate hiking cycle in two decades. The latest data comes two days after the Census Department reported that about 591,000 new single-family houses were sold last month on a seasonally adjusted annual basis, plunging 16.6% below the March rate of 709,000 and falling sharply below analyst projections of 750,000.

Tangent

As the hot housing market pushed median home sales to a record $346,900 last year, home building stocks rallied. Though it’s down 20% this year, the S&P Homebuilders Select Industry Index skyrocketed more than 40% to a record high in December.

Crucial Quote

“The vast majority of homeowners are enjoying huge wealth gains and are not under financial stress, as a result of having locked into historically low interest rates,” Yun explains. “However, in this present market, potential home buyers are challenged.”

What To Watch For

On Wednesday, minutes from the Fed’s meeting earlier this month revealed officials are likely to continue raising interest rates by a half-percentage point in both June and July. “The Fed mostly sees 50-basis-point increases appropriate at the next couple of meetings as they are behind the curve with fighting inflation,” Edward Moya, senior market analyst for Oanda, said in emailed comments, adding that the central bank is “optimistic about the economy,” but “growing concerned with markets for Treasurys and commodities.”

Further Reading

Housing Market Boom ‘Is Over’ As New Home Sales Implode–Here’s What To Expect From Prices This Year (Forbes)

Home Buying Is Becoming ‘Unaffordable For Most Americans’: Here’s What Experts Predict For The Housing Market In 2022 (Forbes)