Pending home sales dropped off significantly in August, pushing the real estate market to a standstill. With increasingly high mortgage rates, fewer people are putting their houses on the market.
So, what does this mean for real estate investors? Let’s dig into the data.
What the Data Says
The National Association of Realtors (NAR) Pending Home Sales Index fell 7.1% to 71.8 in August from July, much greater than analyst expectations of a drop of less than 1%. The index is based on signed contracts to buy a home rather than final sales. According to the NAR, 100 is equal to the level of contract activity in 2001.
The drop came as mortgage rates have surged to their highest level in almost 23 years, from 6.72% to 7.31%. Declines were seen across the country, with pending transactions falling 18.7% from a year ago, when mortgage rates ranged between 4.99% and 5.5%.
The biggest regional decline was in the South, where pending home sales declined 9.1% from the prior month. Meanwhile, the West saw the largest annual decline of 21.4%.
“Mortgage rates have been rising above 7% since August, which has diminished the pool of homebuyers,” said Lawrence Yun, NAR chief economist, in a press release. “Some would-be homebuyers are taking a pause and readjusting their expectations about the location and type of home to better fit their budgets.”
The drop in pending home sales comes after reports of slowing existing and new home sales. This could suggest that the market is cooling.
“Home sales hit a bottom in 2022 and haven’t meaningfully budged since,” said Redfin chief economist Daryl Fairweather in a press release. “Fading recession fears and the prospect of further home price increases have brought some house hunters off the sidelines, but for the most part, buyers remain hesitant to jump into the market because their buying power is so much lower than it was a year ago.”
For many Americans, buying a home doesn’t make sense right now. Although housing prices are starting to fall slightly, high mortgage rates are making it even harder to afford a home. The housing affordability index has steadily declined over the past few years, which could lead to a further decline in housing sales.
Does It Make Sense to Invest in Today’s Real Estate Market?
While the news headlines might not look great, it’s not all doom and gloom. With mortgage rates continuing to skyrocket, it’s caused some homeowners to lower their asking price. While that’s not ideal if you’re trying to sell your home, that’s great news for those trying to buy.
Of course, high mortgage rates mean borrowing costs are higher than they were a year ago. But for those able to offer cash, the lowered prices mean you might be able to find a good deal.
And with real estate costing so much, single-family rentals are still in demand. Overall listing inventory was up 70% in the second quarter of 2022 year over year, while median monthly rent prices may have reached a new peak, according to the National Rental Report from HouseCanary.
There’s also the consideration of what the Federal Reserve might do in the next couple of months. Some investors think the Fed could still raise interest rates, which would increase borrowing costs even more.
JPMorgan Chase CEO Jamie Dimon warned that interest rates could increase as the central bank grapples with elevated inflation and slow economic growth. “I am not sure if the world is prepared for 7%,” he said in a recent interview.
In other words, in just a few months, buying now may look like a better deal.
The Bottom Line
The seller’s market is showing signs of dissipating. While home prices are still high, there are signals that pricing could drop as homeowners struggle with increasingly higher mortgage rates. At the same time, there’s continued demand for single-family homes.
As investors continue to wait and see what the Fed’s next steps will be, now might be the best time to buy. But at the same time, prices could stagnate for a while longer.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.