Pending home sales declined for the third consecutive month in August and for the ninth time in the past 10 months, according to the National Association of Realtors (NAR). After a marginal decline in July, the Pending Home Sales Index (PHSI), a forward-looking indicator of home sales based on contract signings, fell 2.0% to 88.4 in August. According to the NAR, an index of 100 is equal to the level of contract activity in 2001. On a year-over-year basis, pending transactions fell by 24.2% in August.
“The direction of mortgage rates—upward or downward—is the prime mover for home buying, and decade-high rates have deeply cut into contract signings,” says NAR chief economist Lawrence Yun. “If mortgage rates moderate and the economy continues adding jobs, then home buying should also stabilize.”
Yun forecasts the economy will remain sluggish throughout the remainder of 2022 as mortgage rates rise close to 7%. When inflation calms down, Yun says, mortgage rates will begin to steady.
The PHSI in the Northeast region decreased 3.4% from July and fell 19.0% on a year-over-year basis in August. The Midwest index fell 5.2% from July and 21.1% from August 2021.
The South PHSI fell 0.9% from the previous month and declined 24.2% from a year ago. In the West, the index increased by 1.4% in August, though declined by 31.3% on a year-over-year basis.
“Home prices are the least affordable in the West and, consequently, the region suffered deeper annual declines in contract signings due to rising interest rates when compared to other areas of the country,” Yun says. “However, the recent increases of the last two months, though small, are encouraging.”
Looking at the full year, NAR forecasts existing-home sales will decline by 15.2% in 2022 and new-home sales will fall by 20.9% due to the current interest rate environment and weaker economic activity. According to Yun, limited housing inventory and “almost nonexistent” distressed property sales have supported home prices. Overall in 2022, Yun projects prices will rise by 9.6%.
In 2023, Yun projects slower price appreciation and corresponding increases in sales as the year progresses.
“Next year, the annual median home price is expected to rise by only 1.2%,” Yun says. “Home sales will pick up in the second half of 2023, but will be down 7.1% overall.”
