Signed contracts to buy previously owned homes in the U.S. fell in July to the lowest level in two years as rising mortgage rates and higher home prices continued to push entry-level homebuyers out of the market.
The National Association of Realtors said on Wednesday that its pending home sales index tumbled 19.9% in July compared with the same month one year ago. On a monthly basis, pending home sales dropped 1% – less than the 4% decline projected by Refinitiv economists and the nearly 9% drop recorded in June.
"This month’s very modest decline reflects the recent retreat in mortgage rates," Lawrence Yun, NAR’s chief economist, said in a statement. "Inventories are growing for homes in the upper price ranges, but limited supply at lower price points is hindering transaction activity."
The interest rate-sensitive housing market has started to cool noticeably in recent months as the Federal Reserve moves to tighten policy at the fastest pace in three decades in order to cool consumer demand and bring scorching-hot inflation under control.
Policymakers already approved two consecutive 75-basis point rate increases in June and July and confirmed that another supersized hike is on the table in September.
Following the rate hikes, the average rate on a 30-year fixed mortgage – the most popular among new homeowners – climbed to nearly 6% in June, though they have since moderated. The average rate for a 30-year fixed rate mortgage hovered around 5.13% for the week ending Aug. 18, according to recent data from mortgage lender Freddie Mac.
That is significantly higher than just one year ago, when rates stood at 2.86%.
Combined with high home prices, the rapid rise in borrowing costs has pushed many entry-level homebuyers out of the market.
A new report from Redfin last week showed that home sale cancellations soared in July to another two-year high as buyers retreated from the market. About 63,000 home purchase agreements were called off in July, equal to 16% of homes that went into contract that month.
"The deep correction for the U.S. housing market in 2022 continued into July with a sharp decline in sales activity and reduced construction of single-family homes," said Ben Ayers, Nationwide senior economist. "Mortgage rates have edged down in recent weeks and that could boost sales in the near-term, but affordability concerns are widespread in many local housing markets with many buyers now priced out of homes."