The Pending Home Sales Index dropped to its lowest level in history in October, a concerning sign that this year’s housing affordability crisis is starting to yield some nasty consequences.
According to the National Association of Realtors (NAR), home sales under contract dropped 1.5% in October compared to the month prior, with sales down 8.5% year-over-year (YOY). This put the Pending Homes Sales Index to 71.4, its lowest reading since the index was created back in 2001. For context, “an index of 100 is equal to the level of contract activity in 2001.”
According to the National Association of Realtors, the drop in pending sales is the result of limited housing inventory and sky-high mortgage rates. Per NAR Chief Economist Lawrence Yun:
“During October, mortgage rates were at their highest, and contract signings for existing homes were at their lowest in more than 20 years […] Recent weeks’ successive declines in mortgage rates will help qualify more home buyers, but limited housing inventory is significantly preventing housing demand from fully being satisfied. Multiple offers, of course, yield only one winner, with the rest left to continue their search.”
Pending Home Sales Sink Amid Hopes of Improved Housing Affordability
Not for nothing, October may have been the worst month in recent memory as it pertains to housing affordability. If you recall, 30-year fixed-rate mortgages climbed past 8% at one point in October according to Bankrate, the highest level since 2000. This effectively priced out hordes of would-be homebuyers, who in turn opted to wait for rates to go down rather than jump into expensive mortgages with the hopes of refinancing later on.
In that regard, there are some signs of improvement. Indeed, the 30-year has been on the decline in November, dropping to 7.57% this week, a 17 basis-point reduction from the same time last week.
It appears this month’s inflation reports are behind the drop in mortgage rates. Inflation has slowed to nearly 0% month-over-month, per the October Personal Consumption Expenditures (PCE) report. As a result, traders believe the Federal Reserve may opt to lower interest rates in 2024. That would put downward pressure on 10-year Treasury yields, which mortgage rates closely track.
In fact, investors are currently pricing in a roughly 50% chance of a rate cut by March 2024, per the CME FedWatch Tool. This would have notable effects on mortgage rates, which would likely ease come the springtime buying season.
Now, this likely wouldn’t resolve all the issues plaguing the real estate market in 2024. Indeed, the inventory of available homes for sale are still less than half the U.S. average from 1982 to 2023.
Still, according to Yun, conditions are improving:
“Sales for properties priced above $750,000 were higher than a year ago, because there is more inventory at this price point than what we saw last October. Additionally, newly built home sales are up 4.5% year-to-date due to homebuilders’ ability to create more inventory.1 It is vital that we continue to focus on boosting housing supply by all means in all corners of the country over the coming months.”
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
