Contracts to purchase U.S. previously owned homes fell far more than anticipated last month, plunging for a sixth successive month in the latest indication of the heavy toll the Federal Reserve’s interest rate rises are taking on the housing market as the central bank seeks to quell inflation.
The National Association of Realtors (NAR) said on Wednesday its Pending Home Sales Index, based on signed contracts, and slid 4% to 73.9 in November from October’s downwardly revised 77.0. Last month was the lowest reading – not including the short-lived fall in the early months of the pandemic – since NAR launched the index in 2001.
Economists surveyed by Reuters had forecast contracts, which become sales after a month or two, would drop 0.8%. Pending home sales fell 37.8 percentage points in November on a year-on-year basis.
“Pending home sales recorded the second-lowest monthly reading in 20 years as interest rates, which climbed at one of the fastest paces on record this year, drastically cut into the number of contract signings to buy a home,” said NAR Chief Economist Lawrence Yun. “Falling home sales and construction have hurt broader economic activity.”
Contracts dropped in all four regions, led by a 7.9% fall in the Northeast. All four regions also posted double-digit declines on a year-over-year basis, with contract signings in the West declining by 45.7%, by far the greatest regional drop.
“The Midwest region — with relatively affordable home prices — has held up better, while the unaffordable West region suffered the largest decline in activity,” Yun said.
The overall drop in signed contracts indicated that existing home sales would keep falling after posting their 10th successive monthly decrease in November.
The housing market has experienced the most visible effects of aggressive Fed interest rate rises that are aimed at combating high inflation by softening demand in the economy. By the Fed’s preferred measure, inflation is still running almost three times its 2% target, having risen earlier this year at its fastest pace in four decades.
This month the Fed hiked rates again by half a percentage point, capping a year that saw its benchmark rate shoot from near zero in March to between 4.25% and 4.5% now – the fastest rates have soared since the early 1980s. Fed officials predicted rates would climb further next year, likely topping 5%.
Unlike other sectors of the economy – many of which have yet to show a significant impact from the Fed’s actions – the housing market has responded in near real-time to the rise in borrowing costs engineered by the central bank.
Buy Crypto NowThe 30-year fixed mortgage rate went past 7% in October for the first time since 2002, more than doubling in the span of nine months. This knocked the bottom out of what had been a red-hot housing market driven by historically low borrowing costs and a rush to the suburbs during the coronavirus pandemic.
Data last week revealed the combined annual sales rates of new and existing homes through November had dropped by 35% since January – among the swiftest drops on record – to the slowest since late 2011. New single-family housing starts and permit issuance slumped to a two-and-a-half-year low in November as well.
