Pending home sales increased in December for the first time since May, a sign that lower mortgage rates are bringing some buyers back into the housing market.
The pending sales index, based on signed contracts to buy a home rather than the final sales that are accounted for in existing home sales, improved by 2.5% from November to December, according to data released Friday from the National Association of Realtors.
However, that’s down by 33.8% from the frenzied market of a year ago.
“This recent low point in home sales activity is likely over,” said Lawrence Yun, NAR chief economist. “Mortgage rates are the dominant factor driving home sales, and recent declines in rates are clearly helping to stabilize the market.”
Not all regions saw the same levels of activity, however.
Pending sales dropped in the Northeast, where the index was down 6.5% in December from November; and in the Midwest, where the index was down 0.3%.
The national turnaround was largely fueled by upticks in the West and the South. Pending sales were up 6.1% in the South in December from November and rose 6.4% in the West.
While economic uncertainty remains, cooling inflation and a resilient job market have many in the housing industry feeling optimistic that home-buying levels could improve as mortgage rates stabilize.
“The new normal for mortgage rates will likely be in the 5.5% to 6.5% range,” Yun predicted. “Job gains will steadily become important in driving local home-sales markets. The South, in particular, is set to outperform the rest of the country, thanks primarily to better job market conditions in this part of the country.”
Multiple leading indicators in housing are pointing to modestly higher sales activity, said Odeta Kushi, deputy chief economist at First American.
“Mortgage applications have been trending higher alongside lower rates, pending home sales are up, and builder confidence increased in January,” Kushi said. “Interested buyers are out there. From a financial perspective, the decision to buy a home comes down to a payment-to-paycheck calculation, and lower rates may help to reduce the mortgage payment while higher incomes can increase one’s monthly paycheck.”
But affordability will remain a challenge for many, since housing demand remains frozen by high prices and mortgage rates, said Hannah Jones, economic data analyst at Realtor.com.
“Though mortgage rates fell as low as 6.27% in December, down 0.8 percentage points from November’s high, home prices remained elevated, up 8.4% compared to the previous year,” she said.
To many buyers’ relief, mortgage rates have continued to fall since December. The average interest rate for a 30-year fixed-rate mortgage is currently 6.13%, a level not seen since September, according to data from Freddie Mac. A year ago, the 30-year fixed rate was 3.55%.
Mortgage rates have trended downward since early November, and housing affordability improved in December. The national median mortgage payment decreased last month to $1,920, down 2.9% from $1,977 in November, according to the Mortgage Bankers Association.
This trend appears to be continuing in the new year as buyers have been taking advantage of the relatively lower rates of the past few weeks. Another positive signal: Applications for mortgages were up 7% last week from one week earlier, according to MBA.
Yet even with December’s improvement in affordability, mortgage rates were still nearly double what they were in the year before. That means the monthly mortgage payment for a median-priced home was $730 higher in December than in December 2021, according to Realtor.com.
“As a result, many buyers remain on the sidelines, waiting for conditions to improve,” said Jones.
Home inventory remains stubbornly low as homeowners are reluctant to part with their ultra-low mortgage rate for much higher current rates. This is keeping prices elevated, especially as an appetite to buy returns.
“The ongoing lack of affordability has limited buyer activity this winter, but this month’s retreat in mortgage rate has shown how eager buyers are to get back into the market,” said Jones. “Lower interest rates and the coming spring homebuying season promise more opportunities for buyers and sellers alike.”