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Concerns about housing affordability and an impending election stunted pending home sales growth in July, according to the National Association of Realtors pending home sales report on Thursday.
The Pending Home Sales Index (PHSI) declined 5.5 percent month over month to 70.2, the lowest PHSI since NAR began tracking contract signings in 2001. All four regions experienced monthly declines in July, with the Midwest (-7.8 percent to 67.8) and South (-6.5 percent to 83.5) posting the biggest losses.
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Lawrence Yun
“A sales recovery did not occur in midsummer,” NAR Chief Economist Lawrence Yun said in a statement. “The positive impact of job growth and higher inventory could not overcome affordability challenges and some degree of wait-and-see related to the upcoming U.S. presidential election.”
Several economists said pending home sales won’t improve until existing-home median prices and mortgage rates make a meaningful decline.
First American Deputy Chief Economist Odeta Kushi said a decrease in purchase mortgage applications “confirms [the] disappointing news” about pending home sales. The Mortgage Bankers Association’s latest survey said purchase mortgage applications declined 9 percent year over year, despite an 80-basis-point decline in mortgage rates over the past year.
“Average monthly purchase applications have declined in July and August, despite a decline in mortgage rates and increase in housing inventory,” she said in an emailed statement. “Modest improvements in affordability may not be enough to significantly boost demand, as household incomes remain stretched relative to mortgage payments.”
Echoing Kushi, Realtor.com Sr. Economic Research Analyst Hannah Jones said a good chunk of homebuyers simply cannot afford to “participate in today’s market” and pending sales will continue to reflect that frustration until affordability improves.
“Recent mortgage rate improvement stoked buyer demand to some degree, but many buyers are holding out for more significant rate movement before getting into the market,” she said in an emailed statement. “As has been the case over the last couple of years, today’s housing market hinges on affordability.”
“Though inventory has improved significantly year over year, and homes are spending more time on the market, today’s home prices have not fallen significantly from year-ago levels, and are just a few thousand dollars below the 2022 peak,” she added. “As a result, many buyers, though eager, still cannot afford to participate in today’s market, and home sales, including pending home sales, still lag year-ago levels.”
Neither economist said what the magic mortgage rate would be; however, an Aug. 27 Inman Intel and Dig Insights survey of 3,000 working U.S. adults pinpointed a range of 5.5 to 5.0 percent.
“If mortgage rates fell below 5.0 percent, it would convince 25 percent of renters to seriously reconsider their reluctance to buy in the next 12 months,” the survey read. “But sub-5-percent rates would only convince 16 percent of homeowners who are reluctant to buy in the next year to reconsider.”
Even if rates reached sub-5 percent, lacking existing-home inventory would likely keep the market from experiencing the sales rally agents are looking for.
“More new housing construction could be part of the puzzle,” the survey added. “But if builders can’t keep up, rates might have to fall to 4 percent or lower before renters and homeowners warm to the housing market at similar rates.”
