What The January Pending Home Sales Data Show:
Pending home sales fell 4.9% month-over-month in January, settling 8.8% below last January’s level. New home sales, which are also a measure of contract signings, ticked up just 1.5% in January as mortgage rates hovered in the 6.6% range. Existing-home inventory remained scarce in January, but overall active inventory improved 7.9% year-over-year in January. Buyer demand remained elevated to start the year as mortgage rates steadied at their lowest level since June 2023. Mortgage rates have since climbed back towards 7% on the heels of stronger-than-expected employment and inflation data but are likely to improve as these measures of economic strength ease.
Pending home sales improved monthly in the Northeast (+0.8%) and the West (+0.5%), but fell in the Midwest (-7.6%) and the South (-7.3%). All four regions saw contract signings drop relative to one year ago, ranging from a 5.5% annual decline in the Northeast to a 9.0% drop in the South.
What Does This Mean for Buyers, Sellers, & the Housing Market:
Pending home sales, or contract signings, measure the first formal step in the home sale transaction, namely, the point when a buyer and seller have agreed on the price and terms. Pending home sales tend to lead existing home sales by roughly one-to-two months and are a good indicator of market conditions. Buyer demand is closely tied to mortgage rates as lower rates are an avenue to affordability in today’s market. According to a recent survey, roughly 40% of buyers would find it feasible to purchase a home if rates were to drop below 6%. However, roughly 1 in 3 buyers would need to see rates dip below 5% to find a home purchase doable. The recent uptick in rates could mean slower seasonally adjusted sales as the spring homebuying season kicks off. Elevated mortgage rates hinder seller activity as well, amplifying the impact of the housing supply gap that has opened over the last decade. U.S. housing markets continue to struggle with a growing shortage of new homes, the result of more than a decade of under-building relative to population growth.