Pending Home Sales Increased in May Following Six Months of Declining Activity

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The National Association of Realtors reported This Week in Real Estate that pending home sales increased in May following six months of declining activity. On Thursday the Commerce Department shared that the personal consumption expenditures price index, the key inflation gauge tracked by the Federal Reserve, remained flat in May compared to prior month, suggesting that price hikes have taken a breather since hitting a 40-year high in March. The inflation data added some momentum to the mortgage interest rate rally resulting in the lowest rates in three weeks. Below are a few newsworthy events from the final week of Q2 2022 that influence our business: 

Pending Home Sales Edge Higher 0.7% in May. Pending home sales crept higher in May, ending a six-month streak of declines, according to the National Association of Realtors. The Pending Home Sales Index (PHSI), a forward-looking indicator of home sales based on contract signings, inched up 0.7% to 99.9 in May. “Despite the small gain in pending sales from the prior month, the housing market is clearly undergoing a transition,” said NAR Chief Economist Lawrence Yun. “Contract signings are down sizably from a year ago because of much higher mortgage rates.” “Trying to balance the housing market by choking off demand via higher mortgage rates is damaging to consumers and the economy,” Yun added. “The better way to balance the market is through increased supply, which also helps the broader economy.”

Homebuilders Still Find Plenty of Demand in a Cooling Market. Surging mortgage rates have finally cooled off the housing market. The cooldown, though, is coming unevenly, accentuating differences between the existing home market and new construction. While acknowledging that the market has slowed, Lennar Corp. and KB Home said that their businesses have been resilient, at least so far. The current economic environment, in which interest rates are rising but – importantly – the labor market remains solid, appears to be tougher for the existing-home market while homebuilders are able to muddle through. One significant distinction between the two markets is incentives: Homeowners sell for all sorts of reasons; they might not be able or willing to continue paying their mortgage, or they may want to take advantage of higher prices, or just move to pursue other opportunities. Rising mortgage rates have changed the equation. Homeowners may postpone or refuse a sale to wait for better prices, or be unwilling to sell and purchase a new home at a higher mortgage rate. The economy is more uncertain, putting a chill on opportunistic moves. Homebuilders, by contrast, exist to sell homes. If they’re not selling, they’re not making money. They’re just as profit-motivated in a 6% mortgage rate environment as they were at 3%. Sales are still happening for builders, and they seem confident that will continue at least for the near term.

Rates Plummet to 3 Week Lows. Has The Corner Been Turned? Mortgage rates have been volatile in 2022. Most of that volatility has played out in the form of higher rates. The past 2 weeks have been a notable exception. To understand why this is happening, we first need to consider that higher inflation means higher rates. Several big jumps in inflation have forced the Federal Reserve to drastically tighten policy. The resulting surge had covered enough ground by early May that it was time to consider the possibility that they’d topped out indefinitely. Fast forward 3 weeks and rates are just now back to the levels seen on June 10th. So why have rates dropped so much in the past few weeks? First off, they probably rose a bit too aggressively in mid-June. The combination of weaker economic data, cooler inflation, and an apparently overdone rate spike back in June mean it’s once again time to entertain that we’ve seen the top in rates for 2022. 

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