Housing Contract Activity Declines as Mortgage Rates Weigh on Buyers
December saw a slowdown in housing contract activity, indicating that rising mortgage rates are giving potential buyers pause. According to the National Association of Realtors (NAR), the Pending Home Sales Index, which measures contract signings on existing homes, decreased 5.5% month-over-month to 74.2, breaking a four-month streak of gains. An index level of 100 represents contract activity in 2001.
Contract signings fell across all regions of the country, with the most expensive areas bearing the brunt of the impact. The West experienced a 10.3% decline, while the Northeast saw an 8.1% drop. On an annual basis, contract activity dropped 5% in all regions.
"After four consecutive months of gains, this step back is unfortunate but not unexpected," stated Lawrence Yun, NAR's chief economist. "Economic data rarely exhibits a linear trajectory. Despite higher mortgage rates, demand for housing remains robust due to an increase in cash transactions."
Pending home sales serve as a leading indicator of housing market activity since homes usually enter contract a month or two before completion. Despite multiple interest rate cuts by the Federal Reserve, mortgage rates climbed throughout the fall and ended the year near 7%.
The combination of higher mortgage rates and record-high home prices contributed to the slowest year for existing home sales in nearly three decades. According to the NAR, only 4.06 million homes were sold last year, with a median price of $407,500.
Homeowners who secured mortgage rates of around 3% in recent years have been hesitant to sell and surrender their low-cost financing, further limiting inventory.