Housing Contract Activity Declines in December Amid Elevated Mortgage Rates
Housing contract activity experienced a slowdown in December, indicating the impact of rising mortgage rates on potential buyers. According to the National Association of Realtors (NAR), the Pending Home Sales Index (PHS) dropped by 5.5% from November to 74.2, ending a four-month streak of gains. Notably, this level represents a significant decline from 2001, where an index value of 100 indicated normal contract activity.
The downturn in contract signings was observed across all regions. The most expensive regions, where mortgage rates have a substantial impact on affordability, saw the steepest declines. The West recorded a 10.3% drop in activity, followed by the Northeast with an 8.1% decline. Year-over-year, contract activity fell by 5% across all regions.
Despite the downward trend, NAR Chief Economist Lawrence Yun emphasized that the setback should not be seen as a major cause for concern. "Economic data never moves in a straight line," Yun said. "While high mortgage rates have not significantly reduced housing demand, the increase in cash transactions has somewhat offset their effect."
Pending home sales serve as a leading indicator of housing market activity, as contracts are typically signed a month or two before a sale is completed. Despite the Federal Reserve's multiple interest rate cuts, mortgage rates remained elevated throughout the fall, ending the year around 7%.
The combination of elevated mortgage rates and record-high median home prices hindered home sales in 2022, making it the slowest year for existing home sales in nearly three decades. According to NAR, only 4.06 million homes were sold last year, at a median price of $407,500.
Additionally, homeowners who have secured mortgage rates in the low 3% range have been hesitant to sell and surrender their favorable financing, limiting the availability of homes on the market.