Key takeaways
- November 2022 pending home sales decreased 4% compared to October and 38% compared to a year ago.
- Many factors are leading to the slowdown, including high interest rates, fears of a recession and unprecedented home sales in the past few years.
- While some experts predict a small decline in home prices, many expect the housing market to rebound come 2024.
Pending home sales have been dropping for the last six months as buyers pump the brakes on making large purchases. But other issues are at play, including comparing today's numbers against the unprecedented demand during the pandemic. Here is the latest data on pending home sales and what it may signal moving forward.
What are pending home sales?
A home is pending sale when the buyer and seller come to a purchase agreement for a house. This is also referred to as being under contract because both parties have contractually agreed to the terms and conditions of the sale, including the price, inspections, contingencies, etc. The sale of the house will close or be completed once the lending bank reviews all of the buyer's documents, approves the loan and the buyer and seller meet to sign the paperwork. This process usually takes roughly 30-45 days.
A home designated as a pending sale has reached a point where the seller has settled on a buyer. No other buyers can make offers on the house at this point, and the seller is contractually obligated to sell the home to the accepted buyer. If a seller decides to break the contract to sell to another buyer, the original buyer can sue the seller for breach of contract.
Pending home sale numbers are a leading economic indicator for housing market growth and the economy at large. Homebuyers, whether buying their first home or moving from one house to another, help fuel the economy through purchases for their new home. This large items such as replacement appliances to new linens for bedding.
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Looking at the Past Six Months of Home Sales
The National Association of Realtors (NAR) tracks the pending home sales data from over 100 multiple listing services and 60 large brokers around the country. It divides the country into four quadrants from which it collects data to create the Pending Home Sales Index (PHSI). The NAR prefers to use this data instead of other indexes, such as housing starts or new home sales, because it feels that closed sales are the best indicator of actual home sales. It does acknowledge that not every pending home sale closes but 80% of all pending home sales do close, which gives the PHSI the most accurate data.
The NAR uses an index of 100 for a baseline. Numbers below 100 represent slowing sales, and numbers above 100 indicate an increase in sales. Sales for December are published towards the end of January of the following year. The following list is for June through November 2022 and represents home sales data for the entire U.S.:
- June: 90.7
- July: 90.2
- August: 88.5
- September: 80.8
- October: 77.0
- November: 73.9
Digging Deeper Into the Numbers
The numbers show a steady and relatively steep decline over the last six months of available data. The reversal of home sales began in April 2022 after the Federal Reserve started to increase the federal funds rate in March 2022. The initial rate hike was 0.25%, enough to cause an initial 4% reduction in pending home sales. Then in June, the Federal Reserve increased rates by 0.75%. This, along with the earlier rate hikes, resulted in pending home sales dropping 9% compared to the previous month and a 20% decline year over year. The downward trend continued as pending sales in November were 38% lower compared to a year ago.
In years past, the Federal Reserve held the federal funds rate at 0.25% for a long time because the economy was seeing little in the way of inflation, and prices were relatively stable in the housing market. During the pandemic, loose government lending standards unleashed billions of dollars into the economy, which destabilized home prices and caused a bubble. Lending institutions and investors took advantage of the laxity in lending, and investors started buying homes for flipping while banks lent money to just about everyone. These factors, combined with an already tight housing market and supply chain issues, caused housing prices to spike.
Most people buy a house based on their ability to make monthly payments. Bidding wars and people paying over the asking price made it more difficult for the average buyer to purchase a home. Regular market activity was impacted by a large percentage of people moving out of cities as businesses enacted work-from-home options due to the pandemic. This freed people from needing to live within a short distance of their work location. Additionally, some buyers were investors looking to rent the homes they bought for passive income.
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Once the Federal Reserve raised the federal funds rate, borrowing money became more expensive and rapid inflation took away the buying power of the average American. The increase in the mortgage interest rate washed out many would-be investors. Additionally, many people planning to move during the pandemic have already done so. Combine these factors with higher interest rates and you have fewer pending home sales.
Will Home Prices Drop in 2023?
Home prices will most likely drop in 2023, but it's difficult to predict by how much. Housing varies significantly from market to market, and sellers don't like losing money on a sale, even if they sell for more than they spent initially. They frequently hold out for their perceived maximum value, which can keep a home on the market for an extended period until they eventually reduce the price to get the house sold.
Another issue that will put downward pressure on home prices is that borrowing money for a mortgage is much more expensive. As of this writing, the interest rate for a 30-year traditional mortgage is around 6.5% for a borrower with excellent credit. This results in a monthly payment of $1,516 on a mortgage of $240,000, assuming a $60,000 down payment. Often, buyers are hard-pressed to come up with 20% to put down and tend to borrow more towards the mortgage, increasing their monthly payments.
Last but not least, lenders have tightened their lending standards in response to the increase in interest rates and the potential recessionary environment. It's more difficult for borrowers to get a mortgage, and fewer qualified buyers mean homes stay on the market longer and inventory increases. This also has the effect of pushing home prices lower.
Many experts believe that a decline in housing prices will be more regional than national, with some areas seeing larger price declines than others. Even with price declines, most economists see a rebound in housing prices by 2024.
The bottom line
After a boom in housing sales during the pandemic, it is only natural for a slowdown in the market. Add in higher interest rates and fears of a recession, and more potential homebuyers are sitting on the sidelines waiting for more clarity. It should not be surprising to see pending home sales decline further still. However, a larger-than-expected decrease could signal that consumers are preparing for a recession that is worse than initially expected.
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