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A sharp drop in mortgage interest rates attracted home buyers in force in January, but rates rebounded higher, so the gains may be short-lived.
Contracts signed on existing homes jumped 8.1% last month from December, according to the National Association of Realtors. This is the second consecutive month of gains. Sales, however, were still 24% lower than January 2022.
So-called “pending sales” are the most timely indicator of housing demand, as it can take up to two months to complete a signed sale. January sales were lower because they were based on contracts signed in November and December, when mortgage rates were higher.
And the jump in January is entirely related to mortgage rates. After hitting a high of just over 7.3% in October, which sent sales plummeting, the average rate for the popular 30-year fixed-rate mortgage fell nearly 6% in January, according to Mortgage News Daily.
“Buyers reacted to better affordability thanks to lower mortgage rates in December and January,” said NAR chief economist Lawrence Yun.
But mortgage rates rose again in February and the average rate stood at 6.88% on Friday. Business activity is probably already slowing down. Mortgage applications to buy a home, which is a weekly indicator of buyer demand, fell for much of February.
The effect of mortgage rates was also seen in sales of newly built homes in January, as these US Census Bureau numbers are also based on signed contracts, not closings. Builder sales jumped just over 7% from January. Part of that was due to incentives offered by larger builders, but lower rates have improved affordability, especially for entry-level home buyers.
Going forward, with higher rates and a still historically low supply of homes for sale, sales may not be able to sustain this type of growth.
“Home sales activity appears to be bottoming out in the first quarter of this year, before gradual improvements take place,” Yun said. “But an annual gain in home sales won’t occur until 2024. During that time, home prices will be stable in most parts of the country with a minor change in the national median home price.”
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