High Mortgage Rates Sent Home Contract Signings to Record Low in October
- Contract signings for home sales hit a record low in October, the latest indication that the housing market is being smothered by high mortgage rates.
- Monthly mortgage payments have soared as the Federal Reserve has ratcheted up its benchmark interest rate to combat inflation, pricing many would-be buyers out of the market.
- The outlook going forward is somewhat better, because mortgage rates have begun falling from their recent peak.
Fewer homebuyers than ever signed contracts to buy homes in October, by one measure, and the reason was simple—hardly anyone could afford mortgages at sky-high rates.
The pending home sales index—a measure of how many people signed contracts to buy existing (rather than newly built) homes—fell 1.5% in October, reaching its lowest since the index was created in 2001, the National Association of Realtors (NAR) said Thursday. Not coincidentally, the average rate for a 30-year fixed-rate mortgage hit 7.79% in that month, its highest since 2000, according to Freddie Mac.
The drop in pending home sales is another indication of how high mortgage rates, the result of the Federal Reserve’s campaign of anti-inflation rate hikes, have smothered the housing market. Completed home sales fell to a sluggish pace in October according to the NAR, and the rock-bottom rate of home contract signings points to slow sales in the coming days because pending sales typically take one or two months to complete.
High mortgage rates have discouraged homebuying in two ways. First, they’ve made mortgages all but unaffordable for most first-time buyers. The typical monthly payment on a newly bought house, including mortgage interest, insurance, and property taxes, was $2,855 in September, taking up 44.7% of the median family income, according to a home affordability tracker created by the Federal Reserve Bank of Atlanta. That was the worst affordability on record in data going back to 2006.
Second, because many current homeowners secured ultra-low fixed mortgage rates during the pandemic, they’re reluctant to sell. What housing economists call the “lock-in effect” has kept the for-sale inventory low. In October there were less than half the number of homes for sale as the pre-pandemic average, according to the NAR. Low inventory has kept upward pressure on prices, which rose 3.9% over 12 months as of September, according to S&P CoreLogic Case-Shiller Home Price Index data released this week.
Fortunately for buyers sitting on the sidelines, rates have fallen in recent weeks amid signs that the Fed, encouraged by falling inflation, is unlikely to raise its key interest rate any higher and could begin cutting next year. The average rate offered for a 30-year mortgage fell for a fifth week to 7.22% this week, Freddie Mac said Thursday.
That’s likely to improve the situation, although only to a limited extent, Lawrence Yun, chief economist at the Realtors Association, said in a prepared statement.
“Recent weeks’ successive declines in mortgage rates will help qualify more home buyers, but limited housing inventory is significantly preventing housing demand from fully being satisfied,” Yun said. “Multiple offers, of course, yield only one winner, with the rest left to continue their search.”