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WASHINGTON — U.S. pending home sales dropped 7.1% in August from the month prior as mortgage rates surging over 7% in August to levels not seen in 20 years packed a punch.
Pending sales had been on the rise the two months prior, despite elevated prices and higher mortgage rates, according to a report released Thursday by the National Association of Realtors. But rates topping 7% in August snapped that streak.
The pending sales index, a forward-looking indicator based on signed contracts to buy a home rather than the final sales that are accounted for in existing home sales, fell far short of analysts' expectations for a drop in sales of less than 1%.
All four U.S. regions posted monthly losses and year-over-year declines in transactions.
Pending transactions were down 18.7% from August 2022, when average weekly mortgage rates ranged between 4.99% and 5.5%.
Homebuyers are reassessing their options
"Some would-be homebuyers are taking a pause and readjusting their expectations about the location and type of home to better fit their budgets," said Lawrence Yun, NAR's chief economist. "It's clear that increased housing inventory and better interest rates are essential to revive the housing market."
The steep drop in pending sales in August, on the heels of reports of slower existing and new home sales at the end of the summer, suggests that the market is cooling, said Lisa Sturtevant, chief economist at Bright Multiple Listing Service.
It's clear that increased housing inventory and better interest rates are essential to revive the housing market.
– Lawrence Yun, National Association of Realtors chief economist
Overall, she said, total home sales this year could be below 4.2 million; that would be the lowest level since 2010.
With mortgage rates near and above 7% for all of August, purchasers' buying power was crushed, and for many the math for buying a home just did not work.
"At a mortgage rate of 7%, a homebuyer would need an income of over $125,000 to qualify for a loan to purchase a $400,000 home," said Sturtevant.
August may have been the beginning of the end of this resilient housing market — at least for a while, she added.
"Buyers are hitting affordability ceilings, causing some of them to sit out the market," said Sturtevant. "For others, the higher mortgage rates and general economic uncertainty are simply making them more cautious. Either way, expect the number of home sales transactions this fall to be at a decade low."
