A new report from the National Association of Realtors (NAR) found that pending home sales fell 8.6% between May and June, a more considerable monthly decrease than expected. Annually, pending home sale transactions declined by 20%. While homebuying demand is still very high, an increasing number of prospective homebuyers can’t find a home that works with their budget.
With high sales prices and mortgage interest rates, affordability is clearly a concern. NAR reported that the average American home was around 80% more expensive in June 2022 than in June 2019. Because of this, almost 25% of homebuyers who purchased a property in the summer of 2019 wouldn’t be able to afford to buy the same property today.
Lawrence Yun, Chief Economist at NAR, said that steep interest rates are the main factor affecting pending home sales.
“Contract signings to buy a home will keep tumbling down as long as mortgage rates keep climbing, as has happened this year to date,” explained Yun. “There are indications that mortgage rates may be topping or very close to a cyclical high in July. If so, pending contracts should also begin to stabilize.”
NAR predicts that home sales will decline by 13% overall in 2022 but will begin to rise again by the beginning of 2023. In June, every region in the US experienced a monthly and annual decline in pending home sales. On a month-to-month basis, the West fell by 15.9%, the South by 8.9%, the Northeast by 6.7%, and the Midwest by 3.8%. Annually, the West had the largest decline at 30.9%, followed by the South (19.2%), the Northeast (17.6%), and the Midwest (13.4%).
A Growing Chorus of Economists Expect Home Prices to Decline
According to the St. Louis Fed, the average home price grew from $322,600 in Q2 2020 to $440,300 in Q2 2022, a staggering 36% increase. At the beginning of March 2020, average interest rates on a 30-year fixed-rate mortgage were 3.76%, but now they are 5.3%, leading to a 40% increase in borrowing costs. A growing number of leading economists point to affordability challenges as evidence of an imminent pullback in the housing market. Many reputable economists also reacted to the latest home sales with predictions of slowing or even declining home prices.
Daniel Silver, an analyst at JPMorgan, wrote a note to his clients predicting that home prices may appreciate going forward, but at a much slower pace.
“The June new home sales report disappointed and continued what has been a downbeat run,” Silver said. “As demand for housing has come off, we think the rate of home price appreciation should cool, and the weakening in the data on new home sale prices is somewhat consistent with that idea.”
Jeffrey Roach, the chief economist at LPL Financial, pointed to regional differences in the latest pending home sale data release.
“New home sales rose in the Midwest but fell the largest in the West as the labor market continues to churn,” he said. “As workers change jobs and adjust to the hybrid working environment, housing will likely weaken further in areas with high cost of living.”
Ian Shepherdson, the chief economist at Pantheon Macroeconomics, went a step further and predicted that home prices would not only slow but decline over the coming months. As a result, buyers will have more power in the market than they have had in a long time.
“The sellers’ market of the early spring became a buyers’ market more or less overnight, as large numbers of potential purchasers had their spending power dramatically reduced—or were pushed out of the market altogether—by the surge in mortgage rates,” says Shepherdson.