Pending Home Sales Surge After 3 Years, Yet Historic Lows Persist

In December, pending home sales in the United States, a key metric reflecting contract signings for existing homes, experienced a notable rebound. The index for pending home sales surged by just over 8% to reach 77.3, as reported by the National Association of Realtors (NAR) on Friday. This month-over-month increase marked the most substantial rise since June 2020. A reading below 100 indicates a weaker pace of pending contracts.

The December reading surpassed the earlier estimate of a 2% uptick by economists polled by Bloomberg. However, it’s worth noting that pending transactions for December were the lowest for that month since 2001. Although contract signings showed a modest year-over-year increase of just over 1%, they remained 25% lower than the figures recorded in December 2019.

This uptick in the index, seen as an early indicator of the housing market’s health, was influenced by the continued retreat of mortgage rates from multi-decade highs in October. The combination of softer rates and an influx of new listings in the last month provided the catalyst that some potential buyers were waiting for.

Economists caution that any gains in affordability are delicate. The scarcity of existing homes on the market, coupled with rising demand, may exert upward pressure on home prices in the short term.

Lawrence Yun, chief economist at NAR, commented on the positive start to the year for the housing market, attributing it to falling mortgage rates and stable home prices. However, he emphasized the importance of increased supply to meet potential demand, relying on job additions and income growth for enhanced affordability.

In December, rate-sensitive homebuyers found relief as mortgage rates continued to decline from recent highs. After reaching 7.79% in October, the average rate on a 30-year fixed mortgage dropped from 7.03% in early December to 6.69% in the past week, according to Freddie Mac. Overall, rates have declined by over a percentage point, instilling renewed optimism in the market.

This positive trend was reflected nationwide, with pending transactions increasing in three of the four major regions last month. The South witnessed a 12% surge, the West recorded a 14% uptick, and the Midwest saw a nearly 6% increase in pending home sales. The Northeast, however, experienced a 3% decline in pending transactions.

Despite the boost in pending transactions, economists caution that improvements in affordability hinge on whether inventory levels increase this year. While lower mortgage rates have made homeownership more affordable for some buyers, the pace of improvement will depend on factors such as inventory levels, more for-sale options, and potential price adjustments.

Looking ahead, the National Association of Realtors updated its forecast for existing home sales, anticipating a 13% increase to 4.62 million in 2024. The forecast also projects a 1.4% rise in the annual median home price to $395,100 in 2024. This positive outlook aligns with the observed signs of recovery in the housing market, contingent on the trajectory of mortgage rates.