Pending home sales inched higher last month despite seeing declines for most of the past year.
The National Association of Realtors’ Pending Home Sales Index rose 0.7% in May — even as transactions fell year-over-year by 13.6%.
“Despite the small gain in pending sales from the prior month, the housing market is clearly undergoing a transition,” NAR Chief Economist Lawrence Yun said in a press release. “Contract signings are down sizably from a year ago because of much higher mortgage rates.”
Indeed, the 30-year fixed rate mortgage began climbing precipitously at the beginning of 2022, according to data from government-backed mortgage company Freddie Mac. Beginning at slightly over 3% in January, the mortgage rate surpassed 5.75% earlier in June.
The rise in mortgage rates corresponds with the Federal Reserve tapering its aggressive monetary stimulus. In response to COVID-19 and the lockdown-induced recession, the central bank ramped up its purchase of mortgage-backed securities, leading to a decline in mortgage costs. In addition to discharging the securities, monetary policymakers are hiking interest rates — most recently, by a 0.75% increment that represented the boldest move to combat inflation in nearly three decades.
Monthly mortgage payments for the median single-family home have increased by $800 since the beginning of the year, according to the National Association of Realtors. The organization noted that the housing market differs in various regions of the United States. While the West — where real estate is the priciest — saw the largest drop in contract activity, the Northeast and South saw increases. All four regions saw year-over-year decreases in pending sales.
Existing home sales fell by 3.4% in May, according to more National Association of Realtors data, even as the median national sale price surpassed $400,000 for the first time.
Among other factors, high prices are driven by persistent mismatches between the supply and demand for new homes. As of last summer, the United States had an underbuilding gap of 5.5 million to 6.8 million units.
“There is a strong desire for homeownership across this country, but the lack of supply is preventing too many Americans from achieving that dream,” Yun said at the time. “It’s clear from the findings of this report and from the conditions we’ve observed in the market over the past few years that we’ll need to do something dramatic to close this gap.”
Even amid the long-term shortages, analysts from the Federal Reserve Bank of Dallas forecasted a housing bubble due to “market exuberance” that is “unhinged from fundamentals” — a warning that has not been issued since the housing market crash of 2008.
“An asset — in this case, housing — is in the primary expansionary phase of a bubble when price rises are out of step with market fundamentals,” they wrote. “Rapid real house-price appreciation, such as that observed now, does not in itself signal a bubble… But real house prices can diverge from market fundamentals when there is widespread belief that today’s robust price increases will continue. If many buyers share this belief, purchases arising from a ‘fear of missing out’ can drive up prices and heighten expectations of strong house-price gains.”