Pending home sales fall to their lowest level since April 2020

REAL ECONOMY BLOG | September 28, 2022

Authored by RSM US LLP

Pending home sales in the United States fell by 2% in August, the third straight monthly decline amid a steep rise in mortgage rates, according to data released Wednesday by the National Association of Realtors.

On a year-ago basis, pending sales fell by a whopping 22.6%, continuing to signal more room for the housing market to fall further.

The Federal Reserve’s price stability campaign is showing its impact not only on overall demand but also on the housing market. That should not come as a surprise because housing accounts for about a third of the average American consumers’ spending basket.

With the Fed remaining hawkish, we expect more rate hikes in the central bank’s last two meetings of the year, pushing the policy rate to the 4.25% to 4.5% range.

Because more than 80% of pending sales become existing sales within two months, sales of existing homes will most likely continue to drop in the coming months.

While the economy has yet to be in a recession, the housing market has been in free-fall in terms of sales since the start of the year. But that does not mean that housing prices will fall as quickly.

The median prices for existing homes remained high, rising by 7.7% on a year-over-year basis, compared to the five-year average before the pandemic of about 5.4%.

We expect housing prices to have a six-to-12-month lag, which means at the current rate, housing price growth should reach negative territory no sooner than next year.

The outlook relies heavily on the Fed’s course of action toward rate hikes. A more aggressive Fed would sink the housing market further, pushing prices down earlier.

Underneath the top-line number, pending sales fell the most in the Midwest, down by 5.2% on the month. Next was the Northeast, down by 3.4%, and the South, down by 0.9%. Sales in the West went the opposite direction, rising by 1.4% in August.