The numbers: Pending home sales dropped 1.2% in March, according to the monthly index released by the National Association of Realtors. The index measures transactions where the contract has been signed for an existing-home sale, but the sale has not yet closed. This makes the index a strong indicator for the direction of existing-home sales in subsequent months.
“The falling contract signings are implying that multiple offers will soon dissipate and be replaced by much calmer and normalized market conditions,” said Lawrence Yun, chief economist for the National Association of Realtors, in the report. “As it stands, the sudden large gains in mortgage rates have reduced the pool of eligible homebuyers, and that has consequently lowered buying activity.”
Yun said he now predicts existing-home sales will decrease 9% in 2022.
“‘The sudden large gains in mortgage rates have reduced the pool of eligible homebuyers.’”
Key details: This was the fifth consecutive month in which contract signings declined. Compared to a year earlier, pending home sales were down 8.2%. On a regional basis, pending sales dropped by 6.1% in the Midwest, which was the largest decline nationally. Contract signings also fell in the South and West, but rose 4% in the Northeast. Every region saw a decline in pending sales compared with last year.
The big picture: Pending sales have declined for five consecutive months now — and with mortgage rates still soaring to highs not seen in over a decade, that trend is almost certain to continue.
For evidence of this, look no further than mortgage applications. The most recent from the Mortgage Bankers Association shows that applications are overall at the lowest level since 2018. Most of that decline is a reflection of the massive drop-off in refinancing activity as rates have surged higher. But the trade group warned that applications for loans used to purchase homes has trended downward for all loan types, signaling weakness in home sales.
Pantheon Macroeconomics chief economist Ian Shepherdson cautioned that mortgage applications data suggest that home sales could drop by a further 20%. “That will not be the bottom,” he warned in a research note.
Looking ahead: “The spring housing market is off to an unpredictable start, mirroring weather patterns in much of the country which have alternated between heat waves and ice storms. Markets remain clearly tilted in sellers’ favor due to the shortage of homes and sheer number of buyers still determined to lock in predictable monthly payments as an inflation hedge. However, the economic climate is changing as the Fed moves to stem runaway prices by pulling back on credit availability through higher interest rates,” said George Ratiu, manager of economic research at Realtor.com.
Market reaction: The Dow Jones Industrial Average DJIA, -2.77% and the S&P 500 SPX, -3.63% were both roughly flat in Wednesday morning trading, coming on the heels of the Nasdaq’s COMP, -4.17% worst daily finish in more than two years on Tuesday.