Pending home sales slump in January as elevated mortgage rates curb affordability
US pending home sales, a measure of contract signings on existing homes, lost momentum in January as climbing mortgage rates suppressed buyer affordability.
The index for pending home sales dropped 5% in January, according to data from the National Association of Realtors (NAR) released Thursday. The 74.3 reading was the lowest since November and the lowest for the month of January since the NAR first began tracking the data in 2001. A reading under 100 indicates a weaker pace of pending contracts.
Year-over-year contract signings were down nearly 9%, the NAR found.
The drop in the index, an early indicator of the housing market’s health, came as inventory of previously owned homes remained at historic lows last month. Overall, demand is closely tied to affordability, which continues to be curbed by elevated home prices and mortgage rates.
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"Elevated mortgage rates could mean slower sales as the spring homebuying season kicks off," Hannah Jones, senior economic research analyst at Realtor.com, said before adding that current rates also "hinder seller activity, amplifying the impact of the housing supply gap that has opened over the last decade."
'Not yet out of the woods'
Pending home sales, which tend to lead existing home sales by a month or two, are still struggling to pick up — a theme that may persist this spring.
Last year, existing home sales fell to the lowest level in nearly 30 years as borrowing costs climbed due to limited inventory of active listings and elevated rates. Though the inventory of unsold homes increased by 2% to 1.01 million at the end of January, it's not nearly enough to ease home prices.
The median price of a previously occupied home rose to $379,100 in January, the highest on record for that month. The measure also outpaced wage growth for the first time in 14 months, the NAR said.
The challenging market conditions are aggravated by homeowners who refuse to list — and why should they?
Nationwide, some 89% of US homeowners with a mortgage have a rate below 6% as of January, Redfin found. Some 60% have a rate under 4%, and another 23% have a rate under 3%. That’s far below last week’s mortgage rates for the popular 30-year fixed loan, which climbed back to 6.9%, per Freddie Mac.
Any folks moving or listing, for that matter, are doing it out of necessity.
"The listing situation is in very, very low condition, but surely we have many delayed home sellers who have life-changing circumstances," Lawrence Yun, chief economist at NAR, told reporters last week. "Some of them begin to list when rates come down, but we are not yet out of the woods."
Read more: Should you pay for mortgage discount points? 4 tips on how to decide.
Sluggish activity prevailed across the country, as pending transactions fell in two of the four major regions last month, the NAR found. All four regions posted year-over-year drops in transactions.
Pending home sales in the South fell more than 7% in January, down 9% from the previous year. Meanwhile, the Midwest recorded a nearly 8% decrease in pending transactions, down almost 12% from January 2023.
The West and Northeast were a different story.
"Southern states and those in Rocky Mountain time zone experienced faster job growth compared to the rest of the country," Yun said in a press statement. "As a result, long-term housing demand is increasing more significantly in these regions."
In the West, pending home sales registered an uptick of 0.5% but were down 7% from a year earlier. Pending transactions in the Northeast increased 0.8% last month but were 5.5% below year-ago levels.
Yun added: "The timing and number of purchases will largely depend on the prevailing mortgage rates and inventory availability."
5% interest rates: The magic number to boost activity
Potential homebuyers have become increasingly sensitive to climbing borrowing costs, but so have potential sellers. Though the market is largely in favor of sellers, mortgage rates will have to fall quite a lot to convince homeowners to list.
"The job market is solid, and the country’s total wealth reached a record high due to stock market and home price gains," Yun said. "This combination of economic conditions is favorable for home buying. However, consumers are showing extra sensitivity to changes in mortgage rates in the current cycle, and that’s impacting home sales."
A separate survey from Realtor.com revealed that for many existing homeowners, the magic number to convince them to start looking at homes to purchase could be a 5% interest rate.
Some 22% of Americans who hope to buy a home this year believe it would be possible if rates fall below 6%. About a third of the 5,000 consumers polled said they could make it work if rates fell as low as 5%.
Still, nearly half of millennials said they would purchase a home even if rates topped 8%, Realtor.com found, compared to 37% of Gen Z. It’s a sign that there’s still pent-up demand in the market, even if inventory of homes remains woefully scarce.
Whether rates fall that much this year remains to be seen.
"Small changes in mortgage rates indeed have an outsized impact on monthly mortgage payments," Danielle Hale, Realtor.com chief economist, said in a statement. "For first-time homebuyers, if mortgage rates drop in the 5% range, that will boost their purchasing power. For a lot of repeat buyers who already own a home, the lower rates go, the less of a jump they will take in their mortgage payments."
Gabriella Cruz-Martinez is a personal finance and housing reporter at Yahoo Finance. Follow her on X @__gabriellacruz.
