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Pending home sales rose slightly in August as lower mortgage rates provided some motivation to prospective home buyers. But buyers continue to face challenges such as high home prices, and many may be holding out for even lower rates, surveys show.
The National Association of REALTORS®’ Pending Home Sales Index—a forward-looking indicator of home sales based on contract signings—eked out a 0.6% increase in August. Contract signings, however, remain 3% lower than a year ago.
Still, last month’s “slight upward turn [in contract signings] reflects a modest improvement in housing affordability, primarily because mortgage rates descended to 6.5% in August,” says NAR Chief Economist Lawrence Yun. “However, contract signs remain near cyclical lows, even as home prices keep marching to new record highs.”
The housing market remains competitive: 20% of homes sold above list price in August, according to the REALTORS® Confidence Index Surveypdf. Also, NAR reported last week that the median existing-home sales price in August rose to $416,700, up 3.1% from a year earlier. That has put existing-home sales prices closer in line with new-home prices, which saw a median of $420,600 in August. Home builders continue to use price incentives to attract potential buyers to new-home construction and have been ramping up their entry-level inventory. New-home sales below $300,000 comprised 18% of the sector’s sales in August, up from 12% a year earlier, according to the National Association of Home Builders.
Buyers Watch Mortgage Rates Closely
Lower mortgage rates do appear to be coaxing home buyers off the sidelines, though cautiously. As mortgage rates have dropped to two-year lows, mortgage applications for a home purchase—a gauge for future homebuying activity—have been inching up in recent weeks, up 2% in the latest week compared to the same week a year ago, according to the Mortgage Bankers Association. The 30-year fixed-rate mortgage, which averaged 6.09% last week, is down more than 150 basis points from a year earlier.
Many prospective home buyers may be waiting for even lower rates: About 40% of consumers expect mortgage rates to decline over the next year, according to Fannie Mae’s Home Purchase Sentiment Index.
Many home buyers are hopeful that the Federal Reserve’s recent move to lower its benchmark short-term rate will translate into greater savings on borrowing costs.
But while “the Federal Reserve does not directly control mortgage rates, the anticipation of more short-term interest rate cuts has pushed long-term mortgage rates down to near 6% in late September,” Yun says. As such, on a typical $300,000 mortgage, borrowers could now save about $300 per month on a typical $300,000 mortgage compared to a few months ago when rates were much higher.
Lower mortgage rates combined with more homes being listed—up 23% in August compared to a year ago—could open up more opportunities for home buyers in the coming weeks, Yun noted in NAR’s recent existing-home sales report.
Regional Outlook
Contract signings last month rose in the Midwest, South and West while dropping in the Northeast. Despite the recent drop in pending home sales in the Northeast, Yun notes that “in terms of home sales and prices, the region has performed relatively better than other regions in recent months.” Existing-home sales prices in the Northeast were up nearly 8% year over year in August, reaching a median of $503,200, according to NAR.
Last month, however, “contract signings rose in both the most affordable and most expensive regions—the Midwest and West, respectively—because mortgage rates have fallen nationally,” Yun says. “Housing affordability will continue to see notable improvements.”
