Signed contracts to buy previously owned homes in the U.S. plunged more than expected in August as rising mortgage rates and higher home prices continued to push entry-level homebuyers out of the market.
The National Association of Realtors said Wednesday that its pending home sales index tumbled 24% in August compared with the same month one year ago. On a monthly basis, pending home sales dropped 2% — far more than the 1.5% decline projected by Refinitiv economists.
"The direction of mortgage rates — upward or downward — is the prime mover for home buying, and decade-high rates have deeply cut into contract signings," said NAR Chief Economist Lawrence Yun. "If mortgage rates moderate and the economy continues adding jobs, then home buying should also stabilize."
The once red-hot housing sector is in the midst of a severe correction as the Federal Reserve raises interest rates at the fastest pace in decades.
The Federal Reserve raised its benchmark interest rate by 75 basis points for the third straight month in September, following similar rate hikes in June and July — the most aggressive series of increases since 1994. The move puts the key benchmark federal funds rate at a range of 3% to 3.25%, the highest since before the 2008 financial crisis. It also marks the fifth consecutive rate increase this year.
In addition to the large rate hike, Fed officials laid out an aggressive path of rate increases for the remainder of the year. New economic projections released after the two-day meeting show policymakers expect interest rates to hit 4.4% by the end of the year, suggesting that another three-quarter percentage point increase is on the table.
Mortgage rates have more than doubled to 6.29%, according to recent data from mortgage lender Freddie Mac, and could continue to climb higher. And while home price growth has cooled over the past month, prices remain well above where they were just one year ago, putting affordability out of reach for many prospective buyers.
New home sales unexpectedly surged in August, with new single-family home purchases jumping nearly 29%. However, economists largely think that surprise upside is an anomaly and merely represents an effort by buyers to lock in a lower mortgage rate as the average 30-year fixed rate average dipped closer to 5% from earlier highs.
"New home sales were way above expectations in August as homebuilders cut prices and mortgage rates pulled back a bit from June and July levels," said Bill Adams, chief economist for Comerica Bank. "With mortgage rates up making new highs again after the September Fed decision, August’s upside surprise in home sales is unlikely to be repeated."