Pending home sales post biggest jump in 3 years, but remain historically low
US pending home sales, a measure of contract signings on existing homes, rebounded in December as softer mortgage rates lured more buyers back to their purchase plans.
The index for pending home sales increased just over 8% to 77.3 in December, according to data from the National Association of Realtors (NAR) released Friday. The month-over-month uptick was the largest registered since June 2020. A reading under 100 indicates a weaker pace of pending contracts.
The reading exceeded the 2% uptick that economists polled by Bloomberg had previously estimated. Still, December’s pending transactions were the lowest for that month, dating back to 2001. And while contract signings were up just over 1% year over year, they were 25% lower than those recorded in December 2019.
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The uptick in the index, an early indicator of the housing market’s health, came as mortgage rates continued to pull back from multi-decade highs in October. The softening of rates, in combination with an influx of new listings last month, was the break some sidelined buyers were waiting for.
Still, any gains in affordability remain fragile, economists warned. The shortage of existing homes on the market, combined with climbing demand, could push home prices higher in the near term.
"The housing market is off to a good start this year, as consumers benefit from falling mortgage rates and stable home prices," Lawrence Yun, chief economist at NAR, said in a press statement. "Job additions and income growth will further help with housing affordability, but increased supply will be essential to satisfy all potential demand."
'A small win for affordability'
Rate-sensitive homebuyers finally got some relief in December as mortgage rates continued to pull away from recent peaks.
After climbing to its peak of 7.79% in October, the average rate on the 30-year fixed mortgage fell from 7.03% in the first week of December to 6.69% in the past week, according to Freddie Mac. Overall, rates have dropped more than a percentage point — giving buyers a sense of renewed optimism in the market.
Read more: Mortgage rates below 7% — is this a good time to buy a house?
That much was reflected across the country, as pending transactions picked up in three of the four major regions last month, the NAR found.
Pending sales in the South jumped 12% in December, rising 1.5% from the previous year. Meanwhile, the West recorded a 14% uptick in pending transactions, up 1.5% from December 2022.
In the Midwest, pending home sales increased almost 6%, up 4% from a year earlier. The Northeast was the only outlier, which recorded a drop of 3% in pending transactions last month, a decline of 4% from December 2022.
According to the Mortgage Bankers Association, average mortgage applications for existing home sales in December increased 8% from the previous month, and so far in January, have improved 10%.
Some of that boost in pending transactions could have stemmed from an influx of new listings hitting the market last month. Softening rates in December likely contributed to more active home sellers, a separate report from Realtor.com noted, providing buyers with more options.
There were 9% more newly listed homes in the market last month compared to last year. That uptick in listings marked the second month of inventory increases after a 17-month streak of declines.
"Recovering pending home sales activity emphasizes the impact of a small win in affordability, namely lower mortgage rates," Hannah Jones, senior economic research analyst at Realtor.com, said in an emailed statement. "Buyers who are currently priced out of the market are eagerly awaiting progress, which could come in the form of lower mortgage rates, more for-sale options, or lower prices."
Home sales expected to rise in 2024
While lower mortgage rates have improved affordability for some buyers, they are only part of the equation. Any notable improvements to buyers’ budgets will depend on whether inventory levels improve this year, economists said.
"Though an uptick in buyer activity is promising, seller activity may not respond as quickly," Jones said. "If for-sale inventory isn’t able to soak up buyer demand, it is possible that prices will start to climb once again."
While rates are certainly lower than October’s peak, they are nowhere near the rates some homeowners are holding on to.
Approximately two-thirds of homeowners with outstanding mortgages have rates under 4% — much lower than this week’s average rate of 6.69%. As of December, more than 90% of homeowners had a rate of less than 6%.
While rates are projected to ease throughout 2024, they are likely to exceed 6.5% for the majority of the calendar year, Realtor.com projected. That could keep homeowners locked-in to their homes, keeping the inventory of previously owned homes tight.
"Inventory is likely to remain low, which will keep home prices high, underlining the importance of mortgage rate improvement for increasing home sales," Jones said.
The National Association of Realtors, however, released an updated forecast on existing home sales on Friday, anticipating a 13% increase to 4.62 million in 2024.
Under the new projection, the annual median home price is expected to rise 1.4% to $395,100 in 2024.
"The housing market is showing signs of recovery, a trend that is likely to persist if mortgage rates keep on their downward trajectory," Odeta Kushi, deputy chief economist at First American said. "While the level of sales activity remains low, the observed positive growth is a welcome and promising sign for the housing market."
Gabriella is a personal finance and housing reporter at Yahoo Finance. Follow her on X @__gabriellacruz.
