Demand for Homeownership Remains Strong Despite Challenging Housing Conditions
Last month, there was a surge in the number of homebuyers looking to purchase pre-owned homes, despite rising mortgage rates and ongoing inventory challenges.
According to data released by the National Association of Realtors (NAR) on Wednesday, US pending home sales increased by 0.9% in July. This surpassed the Bloomberg economists’ estimated 1% decline.
Year-on-year, pending transactions dropped by 15.6%, slightly below Bloomberg’s predicted decline of 15.7%.
This increase in the index, which serves as a leading indicator of the housing market’s health and predicts closed sales in the next two months, suggests that some homebuyers are still exploring the resale market, despite the prevailing difficult housing conditions. However, other data reveals that many others are turning to new construction for their home purchases.
“The slight gain in contract signings indicates the potential for further increases, especially considering that many buyers have lost out on multiple offers,” commented NAR chief economist Lawrence Yun. “With the addition of jobs, the pool of prospective homebuyers is expanding. However, higher mortgage rates and limited inventory have temporarily hindered the purchasing prospect for many.”
Contract signings in the Northeast witnessed a 5.8% decline, which also represents a 20.2% drop from July 2022. Pending home sales also fell by 0.4% in the Midwest, down 16% from the previous year.
However, there was a 2% increase in activity in the South in July, although there was still a 10.9% decline year over year. The West region showed the most improvement with a 6.2% month-on-month increase, but it was down 12.8% from the previous year.
“It is worth noting that the West region witnessed a significant price decline in the past year, which has resulted in a swift return of buyers,” highlighted Yun.
Despite mortgage rates inching closer to 7% in July, and homebuyers grappling with limited inventory and high prices, the market remains active.
Last month, the average 30-year fixed mortgage rate reached 6.96%, after fluctuating between 6.50% and 6.70% in the previous two months. Consequently, more homeowners chose to stay put, resulting in tighter inventory in the resale market as many resisted selling. This led to a 2.2% decline in existing home sales in July, with overall sales down 16.6% compared to the previous year.
The rise in demand for newly built homes has been notable, with buyers turning to this option due to the shortage of previously owned homes. The surge is not only evident in new home sales, but also in the increased volume of mortgage applications for newly constructed homes, as reported by the Mortgage Bankers Association.
In July, mortgage applications for newly built homes saw a remarkable year-over-year increase of 35.5%, surpassing the 26.1% uptick recorded in June. This indicates that new homes are becoming a more popular choice among buyers. Joel Kan, the deputy chief economist at the MBA, emphasized that applications for purchase loans on newly constructed homes remained strong, with new homes accounting for a growing share of the available properties for sale.
Furthermore, new homes are increasingly attracting first-time buyers, who typically explore the resale market first. According to the MBA’s findings, nearly a quarter of purchase loans backed by the Federal Housing Administration in July were for newly built homes, marking the highest share since May 2020. This trend indicates that more first-time buyers are considering new homes as a viable option, given the limited inventory of existing homes and challenging affordability conditions.
The increase in popularity of new homes among buyers reflects the current real estate landscape, with emphasis on the need for more available inventory and improved affordability options.