A leading indicator for housing market activity—pending home sales—unexpectedly jumped in May and reversed six straight months of declines, according to new data from the National Association of Realtors on Monday, though experts warn that higher mortgage rates will continue to weigh on demand.
Pending home sales, which measure signed contracts on previously owned and existing properties, unexpectedly rose slightly in May, up 0.7% compared to April and surprising analysts who were largely expecting a drop of up to 4%.
Home sales were strongest in the Northeast (up roughly 15%), while other regions like the Midwest and West both saw declines of 1.7% and 5%, respectively.
Pending home sales were still nearly 14% lower than they were a year ago—with year-over-year declines in all major regions as buyers have had to contend with rising mortgage rates in 2022.
The average interest rate on the popular 30-year fixed mortgage home loan now sits at nearly 6%, not far off from its highest levels since the 2008 financial crisis.
Though mortgage rates have been shooting up this year, they moderated somewhat in May which helps explain the surprise increase in pending home sales: The average rate on a 30-year fixed mortgage rose as high as 5.6% in early May before closing out the month at 5.25%, according to Mortgage News Daily.
The 30-year fixed mortgage rate shot up again in June, however, surging to nearly 6.3% before moderating slightly over the last week or so, to 5.85% on Monday.
“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 the National Association of Realtors. “Contract signings are down sizably from a year ago because of much higher mortgage rates.”
Home sales and mortgage applications have both taken a hit so far this year amid rising interest rates and looming recession fears. Other key metrics for housing market activity, such as home builder confidence and traffic of prospective buyers, have continued to decline in recent months. As the Federal Reserve continues to aggressively hike interest rates in a bid to combat inflation, home buying has become significantly more expensive, with experts predicting that demand in the housing market is set to fall.
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The housing market remains unbalanced with demand far outpacing supply, the National Association of Realtors noted. “Trying to balance the housing market by choking off demand via higher mortgage rates is damaging to consumers and the economy,” said Yun. Year-over-year declines in contract activity “further indicated the growing need to increase supply to tame home price growth and improve the chances of ownership for potential home buyers,” he added.