Pending sales, builder confidence plummet to lowest levels in years

Pending home sales and builder confidence have experienced significant declines, reaching their lowest points in years. According to data from the National Association of Realtors (NAR), pending sales fell by 7.3% from August to September, marking the lowest level recorded since NAR began tracking this data in 2001.

The surge in mortgage rates last month, coupled with consistently high home prices, has compelled many prospective buyers to withdraw from the market. The report indicates that pending sales not only dropped month-over-month but also decreased by 11.3% compared to the same month last year. This downturn was much steeper than the anticipated 0.4% decline.

All regions across the United States experienced a drop in signed contracts, with the Western and Southern regions facing the most significant year-over-year declines of 15% and 12%, respectively. The Northeast saw a reduction of 9.4%, while the Midwest experienced an 8.7% decrease.

Hannah Jones, a senior economist at Realtor.com, stated that this stagnation in buyer activity might persist until housing affordability improves. Currently, 30-year mortgage rates are projected to hover around 7.5%. The combination of high rates and elevated home prices has excluded many potential buyers from the market over the past six months. "In this environment, buyers are likely to continue grappling with affordability challenges as wage growth lags behind inflation, further diminishing real purchasing power," Jones explained.

Interestingly, mortgage rates have shown some stability recently. As of October 20, Mortgage News Daily reported that the 30-year mortgage rate was approximately 7.4%. Lawrence Yun, NAR's chief economist, suggested that mortgage rates might be nearing their peak, considering they have already escalated significantly more than the Federal Reserve's short-term interest rate increases. However, he noted that rising energy prices and associated inflationary pressures remain unpredictable.

The homebuilding sector also faced challenges in September. Data from the U.S. Census Bureau revealed that housing starts for single-family homes declined by 4.6% from August, although they were up 2.6% compared to the previous year. When including multifamily construction, overall housing starts fell by 5.2% from August and decreased by 7.4% year-over-year.

Additionally, the completion of single-family homes decreased by 2.4% from August and was down 11% compared to the same month last year. Bill Owens, chairman of the National Association of Home Builders (NAHB), noted that concerns about buyer affordability impact both home sales and construction. He highlighted rising material costs as another significant obstacle for builders. "A sustained increase in homebuilding is essential for long-term affordability, but short-term construction activity depends on mortgage rates, financing conditions, and efforts to alleviate regulatory hurdles," Owens stated.

However, there is a potential advantage for buyers in the new home market, as they may negotiate rate buydowns that could lower their mortgage rates by a full percentage point. Joel Berner, a senior economist at Realtor.com, emphasized that buyers currently hold significant negotiating power in this market, which could enable them to secure "exceptional deals."

Builder confidence has also taken a hit, with the NAHB's monthly index reflecting this trend. In October, builder sentiment decreased by three points to a level of 29, the lowest it has been in over 14 years. Robert Dietz, chief economist at the NAHB, pointed out that federal immigration enforcement actions are also affecting the construction industry. "More than one-third of builders reported experiencing immigration enforcement activities in their areas over the past month, which has led to construction delays and deterred legal workers from coming to work," Dietz noted.