Housing Contract Activity Declines, Suggesting Mortgage Rate Impact
Housing contract activity witnessed a slowdown in December, indicating the influence of rising mortgage rates on buyer behavior. The Pending Home Sales Index, which measures contract signings on existing homes, experienced a 5.5% dip to 74.2 from November, ending a four-month growth streak, according to the National Association of Realtors (NAR).
The index level of 100 signifies contract activity equivalent to 2001 levels. Contract signings declined nationwide, with the most expensive regions bearing the brunt of the impact due to the higher affordability constraints imposed by increased mortgage rates. The West witnessed a notable 10.3% drop, followed by an 8.1% decline in the Northeast. Year-over-year contract activity declined by 5% across all regions.
"Following four consecutive months of gains in contract signings, this setback is not ideal, but it is not completely unexpected," stated Lawrence Yun, NAR's chief economist. "Economic indicators rarely exhibit linear growth. Despite high mortgage rates, robust cash transactions have mitigated their effect on overall housing demand."
Pending home sales serve as a leading indicator of housing market activity, typically preceding home sales completion by a month or two. Despite the Federal Reserve's multiple benchmark interest rate reductions, mortgage rates surged throughout the fall and reached nearly 7% by year-end.
The combined effect of elevated mortgage rates and record median home prices contributed to the slowest pace of existing home sales in nearly three decades last year. According to the NAR, only 4.06 million homes were sold with a median price of $407,500.
Homeowners who secured mortgage rates around 3% in recent years have shown reluctance to relocate and forfeit their favorable financing, thereby limiting market inventory.