Pending home sales posted their biggest jump in 3 years, but remain historically low
Pending home sales in the United States, a measure of the signing of contracts on existing homes, rebounded in December, as lower mortgage rates drew more buyers into their purchase plans.
The Pending Home Sales Index rose just over 8% to 77.3 in December, according to data from the National Association of Realtors (NAR). Released Friday. The month-on-month rise was the largest recorded since June 2020. A reading below 100 indicates a weaker pace of outstanding contracts.
The reading exceeded the 2% rise previously estimated by economists surveyed by Bloomberg. However, December’s pending transactions were the lowest for the month, dating back to 2001. While contract signings were up just over 1% year over year, they were 25% lower than those recorded in December 2019.
The rise in the index, an early indicator of the health of the housing market, came as mortgage interest rates continue to decline from multi-decade highs in October. Easing interest rates, coupled with an influx of new listings last month, was the break some marginal buyers had been waiting for.
However, economists have warned that any gains in affordability remain fragile. A shortage of existing homes on the market, combined with high demand, could cause home prices to rise in the near term.
“The housing market is off to a good start this year, as consumers benefit from lower mortgage rates and stable home prices,” Lawrence Yun, chief economist at NAR, said in a news release. “Job additions and income growth will further help housing affordability, but increased supply will be necessary to meet all potential demand.”
“Small win for affordability”
Interest rate-sensitive homebuyers finally got some relief in December as mortgage rates continue to move away from the recent peak.
After rising to a peak of 7.79% in October, the average interest rate on a 30-year fixed mortgage fell from 7.03% in the first week of December to 7.03% in the first week of December. 6.69% last week, according to Freddie Mac. Overall, interest rates fell by more than a percentage point, giving buyers a sense of renewed optimism in the market.
This was much reflected across the country, with pending transactions rising in three of the four major regions last month, NAR found.
Pending sales in the South jumped 12% in December, up 1.5% from a year earlier. Meanwhile, the West recorded a 14% rise in pending transactions, up 1.5% from December 2022.
In the Midwest, pending home sales rose nearly 6%, up 4% from the previous year. The only outlier was the Northeast, recording a 3% decline in pending transactions last month, a 4% decline from December 2022.
According to the Mortgage Bankers Association, average mortgage applications for existing home sales in December rose 8% from the previous month, and so far in January they have improved 10%.
Some of this boost in pending transactions may have stemmed from the influx of new listings that hit the market last month. The decline in interest rates in December likely contributed to increased home seller activity, which is a separate matter a report From Realtor.com, giving buyers more options.
There were 9% more newly listed homes on the market last month than last year. This rise in listings marks the second month of inventory increases after a 17-month streak of declines.
“The recovery in pending home sales activity underscores the impact of small gains in affordability, namely lower mortgage rates,” Hannah Jones, senior economic research analyst at Realtor.com, said in an email statement. “Buyers who are currently priced out of the market are eagerly awaiting progress, which could come in the form of lower mortgage rates, more sale options, or lower prices.”
Home sales are expected to rise in 2024
While lower mortgage rates have improved affordability for some buyers, they are only part of the equation. Any notable improvements in buyers’ budgets will depend on whether inventory levels improve this year, economists said.
“Although the uptick in buyer activity is promising, seller activity may not respond as quickly,” Jones said. “If the inventory for sale is not able to accommodate buyer demand, prices will likely start to rise again.”
While rates are certainly lower than their peak in October, they are nowhere near the rates some homeowners are clinging to.
almost Two-thirds of homeowners with outstanding mortgages have interest rates below 4% — well below this week’s average rate of 6.69%. As of December, more than 90% of homeowners had a rate of less than 6%.
While rates are expected to decline throughout 2024, they will likely exceed 6.5% for the majority of the calendar year, Realtor.com predicted. This can keep homeowners confined to their homes, making the inventory of previously owned homes tight.
“Inventory will likely remain low, which will keep home prices high, underscoring the importance of improving mortgage rates to increase home sales,” Jones said.
However, the National Association of Realtors released an updated forecast for existing home sales on Friday, predicting a 13% increase to 4.62 million in 2024.
Under the new forecast, the average annual home price is expected to rise 1.4% to $395,100 in 2024.
“The housing market is showing signs of recovery, a trend that is likely to continue if mortgage interest rates continue on their downward trajectory,” said Odita Koshy, deputy chief economist at First American. “While the level of sales activity remains low, the observed positive growth is a welcome and promising sign for the housing market.”