Pending home sales crushed expectations in January, when mortgage rates dropped from recent highs of more than 7% and home buyers jumped at the opportunity.
According to data released Monday from the National Association of Realtors, it was the largest monthly sales increase since June 2020.
The pending sales index, based on signed contracts to buy a home rather than the final sales that are accounted for in existing home sales, rose by 8.1% from December to January, beating economists’ predictions for a rise of 1%. January’s jump followed a downwardly revised 1.1% rise in December.
“Buyers responded to better affordability from falling mortgage rates in December and January,” said Lawrence Yun, chief economist at NAR.
But since then, mortgage rates have risen again, climbing almost half a percentage point since the beginning of February, according to Freddie Mac.
“Mortgage rates took a breath in December and January before resuming their climb in February, reaching 6.5%, the highest level of the new year,” said Hannah Jones, an economic data analyst at Realtor.com.
At the current mortgage rate, the monthly payment on a median-priced home is about 45% higher — or $630 more — than it was at the same time last year, she said. “Many buyers are still holding off, waiting to see if prices or rates give a bit before getting into the market.”
Last year’s persistent increase in both mortgage rates and home prices pushed many would-be home purchasers out of the market, said Jones. This resulted in a slowing of new homes in the building pipeline and fewer sellers listing their homes, which limited options for buyers still in the market.
“New listings were at the lowest level in the last six years in January as sellers stayed on the sidelines, waiting to see buyers return, before placing their homes for sale,” said Jones. “However, the first month of the year brought glimmers of hope as year-over-year declines in both existing and new home sales slowed, and buyer sentiment improved slightly.”
While home sales were down by 24.1% from the still-hot market of a year ago, activity appears to be bottoming out in the first quarter of this year, before incremental improvements will occur, Yun said.
“An annual gain in home sales will not occur until 2024,” said Yun. “Meanwhile, home prices will be steady in most parts of the country with a minor change in the national median home price.”
All regions saw a month-to-month increase in pending home sales, with the Northeast up 6%, the Midwest up 7.9%, the South up 8.3% and the West up 10.1%.
“An extra bump occurred in the West region because of lower home prices, while gains in the South were due to stronger job growth in that region,” Yun said.
Home prices are dropping fastest in areas where prices ran up the most in the frenzied market of the past few years.
But overall, the number of home sales are expected to drop this year, according to NAR’s forecast.
NAR anticipates the economy will continue to add jobs throughout this year and next, with the 30-year fixed mortgage rate steadily dropping to an average of 6.1% in 2023 and 5.4% in 2024.
Even with an improving interest rate environment and job gains, Yun still expects annual existing-home sales to drop about 11% this year from last year, before jumping up about 18% in 2024. NAR projects new-home sales will fall about 4% this year compared with last year before surging nearly 20% in 2024.