Pending Home Sales Fall and Prices Inch Higher
In Real Estate, we sometimes have to keep two seemingly opposing thoughts in our head at the same time in order to truly understand the market.
Right now that means that while sales are down - prices are up.
You would think if sales are down, then prices would soften. Sales are down because there has been less inventory for most of 2023.
PENDING HOME SALES
Based on national data, pending home sales declined in October, falling to the lowest point in more than two decades, according the National Association of Realtors.
So what’s is meant by a pending sale.
Pending sales are the number of homes that have gone under contract, and are thought of as the most reliable forward looking indicator of where the housing market is headed. A sale is listed as pending (or locally in Southern CA as “under contract”) when the contract has been signed but the transaction has not closed. Except for new construction the sales usually being finalized within one or two months of signing. New construction may extend further out as properties are being built.
Pending home sales fell 1.5 percent month over month in October to a reading of 71.4 which is 8.5% lower than a year earlier and the lowest score recorded since the Pending Home Sales Index began publishing in 2001, according to NAR.
The low point in pending home sales came as mortgage rates hit their highest level in 20 years, though they have subsequently retreated slightly. (I guess that means keeping 3 things in your head simultaneously.)
“During October, mortgage rates were at their highest, and contract signings for existing homes were at their lowest in more than 20 years.
Recent weeks’ successive declines in mortgage rates will help qualify more home buyers, but limited housing inventory is significantly preventing housing demand from fully being satisfied. Multiple offers, of course, yield only one winner, with the rest left to continue their search.”
The Pending Home Sales Index:
Increased 2.7 percent monthly in the Northeast (the only region with an increase) even if it was down 6.5 percent from a year prior.
Contracted 0.4 percent to 73.8 in the Midwest in October, down 10.3 percent from a year ago.
Sales in the South decreased 1.9 percent to 85.6 in October, a 7.1 percent decline from the previous year.
Dropped 6 percent on a monthly basis in the West, 10.8 percent below October 2022 levels.
As would be expected, sales are rising in places where more inventory is available. Nationally, sales for properties priced above $750,000 were higher than a year ago, because there is more inventory at this price point than what we saw last October - which is kind of counter intuitive.
Newly built home sales are up 4.5 percent year-to-date due to homebuilders’ ability to create more inventory. And, many builders are giving incentives to either buy down rates or pay for closing costs.
CASE SHILLER HOME PRICE INDEX CONTINUES TO RISE
After steadily declining for seven consecutive months, housing prices have now increased for an even longer streak.
S&P CoreLogic’s latest Case-Shiller U.S. National Home Price NSA Index released 11.28.2023 indicates that for eight months in a row, home prices have gone up. Fifteen of the 20 metro markets measured by Case-Shiller reported month over month price increases. Subsequently the index has reached an all time high.
“U.S. home prices continued their rally in September 2023. The national composite rose by 0.3 percent, marking eight consecutive monthly gains since prices bottomed in January 2023.
The composite now stands 3.9 percent above its year-ago level and 6.6 percent above its January level.
The 10 and 20 city composites each also rose again in September, both higher year-over-year.”
On a year-to-date basis, the national composite has risen 6.1 percent, which is well above the median full calendar year increase in more than 35 years of data.
Notably, the national composite, the 10-city composite and 10 individual cities stand at their all-time highs.
BUT WHAT ABOUT MORTGAGE RATES?
As you most likely know if you are reading this, the Federal Reserve’s aggressive moves to combat inflation including 10 consecutive rate hikes over 2022 and 2023 have put upward pressure on mortgage rates. While the Fed doesn’t directly set mortgage rates, the mortgage market’s interpretations of the central bank’s moves influence how much you pay for your home loan. (the ten year bond is what you have to watch for the direction of mortgage rates.)
The long period of low mortgage rates following the Great Recession came to an end in 2022. In June 2022, rates topped 6 percent for the first time since 2008. The upward trend continued in October, when rates topped rates topped 7 percent, then 8 percent. As of November 21, 2023, the average 30-year mortgage rate had backed off the 8 percent threshold, sitting at 7.55 percent. So basically more than double where a lot of mortgages that were refinanced during the pandemic are.
The higher rates also make the housing inventory shortage worse and stop many homeowners from selling when they otherwise might. Those homes that are kept off the market and out of the supply of available housing make things worse for buyers.
WHAT DOES THIS MEAN FOR BUYERS AND SELLERS?
The current market has proved challenging on both sides of the real estate transaction so unless there is a significant drop in either home prices or mortgage rates, both buyers and sellers will need to go with the flow. For prospective sellers, the new status quo dictates they remain flexible on price, given the extraordinary challenges posed by the sharp increase in mortgage rates.
For those who are very motivated to purchase a home - be prepared for the sticker shock associated with the increased expense of financing. Part of the flexibility that may be required includes seeking a possible downgrade of footprint or quality of home, along with the neighborhood, in order to achieve an affordable purchase. Or paying more until you can refi.
So while buying a home in today’s market is difficult, on the other side of the equation the average time active listings stay on the market is getting longer, resulting in a less competitive market. The National Association of Realtors data proves that out: The median days-on-market length as of the end of November 2023 is up both month-over-month and year-over-year.