US Pending Home Sales experienced a significant drop of 6.3% in April, marking a continued struggle within the housing market. This drop occurs as pending existing home sales dipped 0.5%, staying close to multi-year lows. High mortgage rates exacerbate the muted conditions, with homebuyer affordability becoming an increasing worry.
Market analysts suggest that the current environment, characterized by rising mortgage rates and a cautious Federal Reserve outlook, is likely to keep the housing market under pressure. The US 20-year Treasury yield touched 4.94% on Tuesday and the 30-year Treasury yield briefly eclipsed 4.93%. As a consequence, would-be homebuyers are being priced out of the market.
High Mortgage Rates Impact Housing Affordability
The surge in mortgage rates has significantly affected homebuyer affordability, with the median payment for purchase applicants climbing to $2,186 in April. This dramatic rise represents yet another hurdle for would-be homebuyers to overcome in a market that has been making it increasingly difficult to do so.
The Federal Reserve’s latest rhetoric appears to entrench a “higher-for-longer” interest rate view. The draft minutes from the May meeting and a handful of recent addresses clearly indicate that policymakers are intent on continuing to battle inflation. This half-hearted commitment fosters doubt in the housing industry. New York Fed President John Williams emphasized the importance of addressing inflation, stating, “the need to prevent inflation from becoming highly persistent.”
The FXstreet Fed Sentiment Index crossing 110 shows the Fed doubling down on its hawkish narrative. This shift in priorities has real consequences for mortgage rates and housing affordability. NAR Chief Economist Lawrence Yun stated, “At this critical stage of the housing market, it is all about mortgage rates.” Increased mortgage rates will be key to enticing new or previously out-migration homebuyers back into the market. Yun drove home this lesson, stressing, above all, that context matters.
Regional Disparities in Home Sales
Pending home sales fell everywhere. This decline affected all four of the US’s major regions. Every region still posted month-over-month decreases in contract signings, a clear signal that buyer sentiment has plummeted across the nation. Compared to this trend, the Midwest region was able to secure a small year-over-year increase. At the same time, declines were spanned across the Northeast, South, and West.
The slowing trend of existing home sales is another important volume gauge for the US housing market. Addressing the reason for the downturn, Dallas Fed President Lorie Logan said that policy remains “in a good place.” This suggests that strong incentives do not exist for raising interest rates in the near term. This view provides scant comfort to would-be home purchasers or mortgage providers contending with today’s unprecedented housing market.
Long-term Economic Factors at Play
Recent economic developments, including unprecedented construction price inflation, have made a bad situation even worse for the housing market. If Moody’s were to cut the rating of US sovereign debt, it would have a very large impact on longer-term yields. Even after a small retracement from 18-month highs, these yields are still at historically high levels. This uncertainty about fiscal health adds a new, dangerous wild card to the mix for would-be homebuyers.
Mortgage rates are increasing, and affordability is deteriorating. Yet most economists are already predicting that the housing market will continue to be weak for at least the next several years. The Fed’s current approach, coupled with high yield rates and growing economic concerns, suggests a prolonged period of adjustment for both buyers and sellers.