The Housing Crisis Is Here: Pending Home Sales Fall to Record Low
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Fewer Americans signed contracts to buy homes in September, and the drop was steep. The National Association of Realtors reported on October 20 that pending home sales fell 7.3% from August and 11.3% from a year earlier. All four regions declined. The West fell hardest, followed by the South, Midwest and Northeast.
Pending sales count signed contracts, which usually close within one or two months, so September’s decline points to weak completions in the fall reports. Completed sales were already running at an annualized 3.99 million in September, well below the 4.5 million to 5.5 million range associated with a healthy market.
A Fast Rate Spike Did the Damage
Mortgage rates hurt the market. In late February, Freddie Mac’s average 30-year fixed rate sat at 5.98%. By mid-October it had rose to 7.4%, the highest reading of the past year. Mortgage rates track the bond market, and the 10-year Treasury yield topped out at 5.31% on October 5.
Here is what that means at the kitchen table. On a $400,000 loan, the monthly principal-and-interest payment rises from about $2,390 at February’s rate to roughly $2,770 at the October peak. Even at last week’s 7.18%, the payment is near $2,710. That works out to about $3,800 a year more than the same house cost in February. A typical raise doesn’t cover that.
NAR Chief Economist Lawrence Yun said “housing affordability is more affected by changes in mortgage rates” than by job or income gains. He added that mortgage rates “have already risen much more than the Federal Reserve’s short-term interest rate hikes.”. The Fed’s upper-bound target stands at 4.00%. Bond investors are driving the pain, so the Fed can’t reverse it directly.
Prices Hold While the Market Freezes
Usually, when buyers pull back, prices fall. This time they have barely moved. The Case-Shiller national index slipped 0.2% in August, one month after reaching its 12-month high. Yun credits the small number of distressed sellers and says “buyers and sellers may simply be holding back until mortgage rates move favorably.”
That leaves regular Americans with the worst of both worlds, facing high prices and high payments, while owners with cheap locked-in loans stay put and first-time buyers can’t afford the monthly cost. Consumers feel it. University of Michigan sentiment fell to 48.1 in September, below the 60 level tied to recessions. Builders are pulling back too. Housing starts dropped 5.2% to an annualized 1.22 million.
Some local markets are already cracking. Federal Housing Finance Agency data show prices in Boulder, Colorado down 2.26% over the year through the second quarter, and Brunswick-St. Simons, Georgia down 4.9%.
Signals That Decide Whether Relief Arrives
Some relief has started. The 10-year yield fell to 4.86% on November 6, and Yun said rates “could be topping out.” Two numbers will show whether that matters. First, watch whether Freddie Mac’s weekly 30-year average drops back below 7%, a level it last held in mid-September. Second, watch Case-Shiller for a negative year-over-year reading. A negative print would mean the freeze has turned into a price correction, which would hit the home equity many retired people rely on.
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After two decades of patrolling the dark corners of suburbia as a police officer, Rich Duprey hung up his badge and gun to begin writing full time about stocks and investing. For the past 20 years, he’s been cruising the markets looking for companies to lock up as long-term holdings in a portfolio while writing extensively on the broad sectors of consumer goods, technology, and industrials. Because his experience isn’t from the typical financial analyst track, Rich is able to break down complex topics into understandable and useful action points for the average investor. His writings have appeared on The Motley Fool, InvestorPlace, Yahoo! Finance, Money Morning, and, of course, 24/7 Wall St. He has been featured in both U.S. and international publications, including MarketWatch, Financial Times, Forbes, Fast Company, and USA Today.
