Economists say the residential real estate market is showing signs of “normalizing”, giving hope to hard-pressed buyers who have increasingly found themselves priced out of a market characterized by soaring home prices and low inventories.
In March, pending home sales fell for the fifth consecutive month, the National Association of Realtors reported this week. Only the Northeast saw an increase in contract signings compared to the month prior, with decreased reported in every other major region.
“The falling contract signings are implying that multiple offers will soon dissipate and be replaced by much calmer and normalized market conditions,” said Lawrence Yun, the NAR’s chief economist. “As it stands, the sudden large gains in mortgage rates have reduced the pool of eligible home buyers, and that has consequently lowered buying activity. The aspiration to purchase a home remains, but the financial capacity has become a major limiting factor.”
NAR’s Pending Home Sales Index, a forward-looking indicator of home sales based on contract signings, dropped 1.2% in March to a reading of 103.7. (An index of 100 is equal to the level of contract activity in 2001.) Overall, contract signings fell 8.2% year over year in March.
The drop comes at a time when inflation is running at a 40-year high and living costs are rising. Yun expects inflation to average 8.2% in 2022. He predicts that it will start to moderate, however, to 5.5% in the second half of the year.
Home buyers are also facing higher borrowing costs. Yun predicts the 30-year fixed-rate mortgage to average 5.3% by the fourth quarter of this year. He expects rates to average 5.4% by 2023.
Higher mortgage rates and sustained price appreciation has led to a year-over-year increase of 31% in mortgage payments in March, according to NAR’s data.
“Overall existing-home sales this year look to be down 9% from the heated pace of last year,” Yun explained. “Home prices are in no danger of decline on a nationwide basis, but the price gains will steadily decelerate such that the median home price in 2022 will likely be up 8% from last year.”
Rental costs are also surging higher. Monthly payments have soared, and Yun predicts more renters will explore homeownership as a result to the higher costs.
“Fast-rising rents will encourage renters to consider buying a home, though higher mortgage rates will present challenges,” Yun added. “Strong rent growth nonetheless will lead to a boom in multifamily housing starts, with more than 20% growth this year.”