In August, the number of signed contracts to buy previously owned homes in the U.S. plunged more than expected as rising mortgage rates and higher home prices kept entry-level homebuyers out of the market.
The National Association of Realtors said on Wednesday that the pending home sales index fell 24% in August compared to the same month a year ago. On a monthly basis, home sales fell 2% — much more than the 1.5% decline predicted by Refinitiv economists.
The direction of mortgage rates — upward or downward — is the prime mover for home buying, and decade-high rates have deeply cut into contract signings, said Lawrence Yun, NAR Chief Economist. If mortgage rates are moderate and the economy continues to add jobs, home buying should also be stabilized. The Federal Reserve raises interest rates at the fastest pace in decades, and the housing sector is in the midst of a severe correction.
The benchmark interest rate went up by 75 basis points for the third month in September, following similar rate hikes in June and July, the most aggressive series of increases since 1994. The key federal funds rate is now at a range of 3% to 3.25%, the highest since the 2008 financial crisis. It is the fifth consecutive rate increase this year.
In addition to the large rate hike, Fed officials laid out an aggressive path of rate increases for the rest of the year. The new economic projections released after the two-day meeting show that policymakers expect interest rates to hit 4.4% by the end of the year, suggesting that another three-quarter percentage point increase is on the table.
Mortgage rates have more than doubled to 6.29%, according to recent data from mortgage lender Freddie Mac, and could continue to climb higher. While home price growth has cooled over the past month, prices remain well above where they were just one year ago, putting affordability out of reach for many prospective buyers.
In August, new home sales unexpectedly surged, with new single-family home purchases jumping nearly 29%. The average 30 year fixed rate average fell closer to 5% from earlier highs, and economists think surprise upside is an anomaly and merely an effort by buyers to lock in a lower mortgage rate.
Bill Adams, chief economist for Comerica Bank, said that new home sales were well above expectations in August as homebuilders cut prices and mortgage rates went back a bit from June and July levels. After the September Fed decision, August s upside surprise in home sales is unlikely to be repeated, with mortgage rates up making new highs.