Rising borrowing costs are cooling off what was once a blistering hot housing market.
Pending home sales, a leading indicator of health for the housing market, declined for the fifth straight month in March, according to the National Association of Realtors (NAR).
The trade group’s index that tracks the number of homes under contract to be sold fell 1.2% to a reading of 103.7 in March from the previous month and sank 8.2% from a year ago. An index of 100 is equal to contract activity in 2001, said NAR. Analysts expected a 1.1% decline in pending sales from a month earlier, according to consensus estimates.
The results underscore the challenging conditions homebuyers face as a lack of properties drive asking prices to record highs. They also suggest that the decline in housing activity is likely to continue.
“The falling contract signings are implying that multiple offers will soon dissipate and be replaced by much calmer and normalized market conditions,” Lawrence Yun, NAR’s chief economist, said in a press statement. “As it stands, the sudden large gains in mortgage rates have reduced the pool of eligible homebuyers, and that has consequently lowered buying activity.”
While rising mortgage rates may have jolted some hesitant homebuyers into action last month, overall housing activity waned as contract signings shrunk by the end of March across all four major regions.
“The aspiration to purchase a home remains, but the financial capacity has become a major limiting factor,” said Yun, who expects the rate on the 30-year fixed rate mortgage — the most common home loan — to reach 5.3% by the fourth quarter.
A week ago, mortgage rates increased to 5.11%, 2 percentage points higher than at the start of the year, and the highest level since April 2010.
The rapid increase in mortgage rates in March jacked up the average monthly mortgage payment by 31% versus a year ago, according to NAR. That’s $400 more per month on a median-priced home compared with a year ago, according to George Ratiu, manager of economic research at Realtor.com.
“The sharp increase in rates came in tandem with record-high list prices, and continued declines in the number of homes for sale,” Ratiu said.
Would-be buyers are largely stuck between rapidly rising rents and an unaffordable for-sale market. Then, there’s runaway inflation, eating into budgets every month.
“Markets remain clearly tilted in sellers’ favor due to the shortage of homes and sheer number of buyers still determined to lock in predictable monthly payments as an inflation hedge,” said Ratiu. “...At the end of every month, Americans are finding that there is less money left out of each paycheck. We can expect these factors to lead to fewer transactions in the months ahead, as many first-time buyers find themselves priced out of the market.”
Overall, Yun expects existing sales this year to be down 9% from “the heated pace of last year.”
“Home prices are in no danger of decline on a nationwide basis,” he said, “but the price gains will steadily decelerate such that the median home price in 2022 will likely be up 8% from last year.”
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.