Pending home sales fell back to pre-pandemic level amid rising rates

U.S. pending home sales fell 1.2% in March, declining for the fifth month in a row, as demand continued to slow due to high home prices and rising mortgage rates.

The National Association of Realtors’ index for pending home sales is a proxy for future sales of existing homes as about 80% of pending sales will be finalized within two months.

Chart of pending v. existing home sales

The index dropped to 103.7 in March, the lowest since July 2020, and is now back to its 2019 pre-pandemic level. That means existing sales in the next two months will likely drop further. It would not be a surprise if the housing market moves back pre-pandemic levels of sales volume in the second half of the year, given the rapid increases in mortgage rates in recent months.

While home prices remained high, the sharp pullback in demand is expected to ease price escalation, while also curbing the incentive for builders to build more homes. But housing prices often take quite long to come down even when demand cools. On top of that, inflation is expected to remain above the Federal Reserve’s 2% target rate until 2024, putting more pressure on prices and builders’ costs.

The data suggests that a ‘worst-of-both-worlds scenario’ might likely be on the horizon over the next two years: low sales and elevated prices.

Therefore we strongly believe that it is crucial for the government to step in early with targeted housing policies that help Americans who have been priced out of the home buyers’ market and forced to deal with rising rents as a result of skyrocketing home prices.

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This article was written by Tuan Nguyen and originally appeared on 2022-04-27.
2022 RSM US LLP. All rights reserved.
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