Lower Mortgage Rates Spark Home Sales Rebound
The real estate market is seeing a surge in activity as buyers return to the market with falling mortgage rates. According to the National Association of Realtors (NAR), pending home sales increased for the second consecutive month in January, with contract signings rising by 8.1% from December. This is the largest month-to-month gain since June 2020. Meanwhile, sales of newly built single-family homes rose by 7.2% last month, according to the Commerce Department.
Mortgage rates had crossed the 7% threshold in November, reaching double the rate from a year earlier, which discouraged potential buyers. However, since the beginning of the year, the 30-year fixed-rate mortgage has decreased to the 6% range, with less volatility in fluctuations. NAR predicts that mortgage rates will average 6.1% this year and 5.4% in 2024. NAR Chief Economist Lawrence Yun credits falling mortgage rates for better affordability and a rebound in buyer activity.
With an improving interest rate environment and recent job gains, the housing outlook is more positive. While home sales activity appears to be bottoming out in the first quarter, Yun anticipates that an annual gain in home sales will not occur until 2024. On an annual basis, contract signings are still down by 24.1% from the pandemic-fueled homebuying frenzy.
Although home prices may remain steady in most parts of the country, the national median home price is expected to fall by 1.6% to around $380,100 this year, moderating after rapid gains over the previous two years. NAR projects home prices to gain momentum next year, rising by 3.1% to $391,800. In addition, NAR estimates a 1.3% increase in the median new-home price to $461,000 in 2023, followed by a 2.8% increase in 2024 to $474,000. NAR attributes the projected gains in new-home prices to higher costs of land and construction materials.
All four major regions of the U.S. posted monthly gains in contract signings in January, with the West seeing the largest increase, followed by the South. According to Yun, the West saw an extra bump due to lower home prices, while gains in the South were due to stronger job growth. The National Association of Home Builders credits builders' sales incentives, such as mortgage rate buydowns, paying points for buyers, or even offering price reductions, for bringing home buyers back to the market. Fifty-seven percent of builders have reported using incentives to bolster sales, according to NAHB surveys.
However, affordability remains a concern for many homebuyers. The median price for a new home has fallen for three consecutive months, dropping by 8.2% from December to $427,500 in January, according to the NAHB's assistant vice president for forecasting and analysis, Danushka Nanayakkara-Skillington. Nevertheless, completed, ready-to-occupy inventory has increased by 115% compared to a year ago, although it still comprises only 17% of the total stock of new homes.
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