Pending home sales plummeted in August, according to the National Association of Realtors (NAR), another indication that the housing market continued to suffer under the weight of high borrowing costs as mortgage lending rates hit the highest levels since the beginning of the century.
The data from NAR which gives insights into would-be home sales based on contract signings showed that it fell 7.1 percent last month and nearly 19 percent from a year ago. The data comes as the 30-year fixed-rate mortgage, the most popular house loan, hit above 7.3 percent, a two-decade high.
The elevated rates are crowding out potential home buyers as they are scared away by the potentially expensive monthly payments they will have to make due to the exorbitant rates.
“Mortgage rates have been rising above 7% since August, which has diminished the pool of home buyers,” Lawrence Yun, NAR’s chief economist, said in a statement Thursday. “Some would-be home buyers are taking a pause and readjusting their expectations about the location and type of home to better fit their budgets.”
The current housing market is different from what it was at the start of the century, according to mortgage lender Freddie Mac, as it is accompanied by rising house prices.
“These headwinds are causing both buyers and sellers to hold out for better circumstances,” the lender said.
Part of the reason prices have jumped is due to the low availability of homes for sale. Construction of new homes has declined while sellers of previously owned homes are holding back as they are reluctant to do away with properties that they may have acquired during an environment of low rates.
“It’s clear that increased housing inventory and better interest rates are essential to revive the housing market,” Yun said.
Mortgage rates have soared as the Federal Reserve hiked rates to a two-decade high of the current level of 5.25 to 5.5 percent to battle inflation. Policymakers from the central bank have also indicated that they may raise rates at least one more time this year and keep them elevated for a while.
NAR suggested that the Fed may need to take a pause in its rate moves, especially as the policy environment may hit the rental market too.
“The Federal Reserve must consider the sharply decelerating rent growth in its consideration of future monetary policy. There is no need to raise interest rates,” Yun said.
The souring interest in home buying was felt across the country, the NAR said. Sales in pending homes fell in all four U.S. regions in August from last month and also compared to one year ago.
Another dynamic that may affect home sales is the impending shutdown of the government that may come as the Republican-led House of Representatives has struggled to move forward with spending bills that will keep federal agencies open beyond the September 30 deadline.
“Moreover, the government shutdown will disrupt some home sales in the short run due to the lack of flood insurance or delays in government-backed mortgage issuance,” NAR’s Yun said.