A key leading indicator for the housing market plunged to its lowest reading since April of 2020, the latest sign that the Federal Reserve’s attempts to quell inflation has stifled sales of previously owned homes.
The National Association of Realtors’ index of pending home sales fell 7.1 percent in August, the trade group said Thursday.
The decline was bigger than even the most pessimistic estimates. Economists had been expecting a milder one percent decline following a 0.9 percent increase in July.
“Mortgage rates have been rising above 7% since August, which has diminished the pool of home buyers,” said Lawrence Yun, NAR chief economist. “Some would-be home buyers are taking a pause and readjusting their expectations about the location and type of home to better fit their budgets.”
Year over year, pending transactions dropped by 18.7 percent, the NAR said.
Mortgage rates rose to their highest in decades in August—and have continued to climb in September. In August, the average rate was 7.07 percent for a 30-year fixed mortgage. The last time the average rate exceeded seven percent for a month was 2002.
As of last week, the rate had climbed to 7.19 percent, the highest since 2001.
Most homeowners with mortgages are paying below six percent. Many bought homes or refinanced when rates were much lower. The sudden increase in mortgage rates during the Biden presidency has meant that homeowners who sell their homes must accept much larger higher rates on their next home. Many are choosing to stay put rather than trade into a seven percent plus mortgage.
The increase in rates means that a homeowner could buy a much less expensive house and still face a higher monthly payment. This has left many Americans essentially “locked in” to their current homes.
Mortgage rates have responded to an increase in longer-term interest rates. Those rates are up because the Fed has hiked short-term rates and said that rates will have to stay elevated to bring inflation back down to two percent. Since Biden took office, the consumer price index is up around 16.2 percent, much higher than the cumulative 3.2 percent inflation in the equivalent period of the Trump administration.
As a result, the inventory of existing houses for sale is very low and prices are climbing. The combined effect of high rates and high prices has created the least affordable housing market in decades.
“It’s clear that increased housing inventory and better interest rates are essential to revive the housing market,” added Yun.
The Pending Home Sales Index is considered a forward looking indicator of home sales. It is based on contract signings that typically become closed sales 45 to 60 days later. In August, the index sank to 71.8. A reading of 100 is equal to the level of contract activity in 2001.
In April 2020, the pending home sales index dropped 21.8 percent to 69.0, the lowest level ever recorded since the series began in January 2001.