Positive news on pending home sales for the first time this year
Pending home sales activity stopped a six-month slide in May and posted a positive return of 0.7% from April nationally. According to the National Association of Realtors® (NAR), the increase in contract activity was led by the Northeast, which saw a 15.4% bump from April. Despite the positive news, all four regions were down 13.6% from a year ago.
- Northeast: up 15.4% to 86.7, down 11.9% from May 2021
- Midwest: down 1.7% to 98.6, down 8.8% from May 2021
- South: up 0.2% to 119.0, down 13.8% from May 2021
- West: down 5.0% to 81.6, down 19.8% from May 2021
The Pending Home Sales Index (PHSI) is a forward-looking indicator of home sales based on contract signings. An index of 100 is equal to the level of contract activity in 2001. In May, we saw the index land at 99.9.
"Despite the small gain in pending sales from the prior month, the housing market is clearly undergoing a transition," said Lawrence Yun, Chief Economist at NAR. "Contract signings are down sizably from a year ago because of much higher mortgage rates."
Searching for an answer to the affordability problem
With mortgage rates spiking up 2.5% since January, potential homebuyers are getting squeezed out. One cause of this is that home prices keep going up, as well, driven by demand. NAR has determined that the monthly mortgage payment for a home at the median single-family home price, with 10% down payment, has gone up about $800.
Demand still continues to outpace supply, even with positive news on the new home construction front in recent months. But with mortgage rates where they are, it could soften demand, but still not solve the underlying issue that has plagued the housing market since before the pandemic even started—low inventory.
"Trying to balance the housing market by choking off demand via higher mortgage rates is damaging to consumers and the economy," Yun notes. "The better way to balance the market is through increased supply, which also helps the broader economy.
"The largest decline in contract activity was observed in the West region, where homes are the most expensive," he adds. "This further indicates the growing need to increase supply to tame home price growth and improve the chances of ownership for potential home buyers."