The Impact of Rising Mortgage Rates on Home Sales

In April, signed sales contracts on existing homes dropped by 7.7% compared to March, marking the slowest pace since April 2020. This decline in pending sales, which are an indicator of closed sales one to two months later, was 7.4% lower than in April of the previous year. The drop was unexpected, as sales were anticipated to remain flat compared to the previous month. The main driver behind this decrease was the sharp increase in mortgage rates, with the average rate on the 30-year fixed mortgage soaring from around 6.9% at the end of March to 7.5% by the end of April.

The impact of rising mortgage rates on home sales was felt across all regions of the country, with the Midwest and West experiencing the most significant declines. These regions have contrasting housing markets, with the Midwest having some of the most affordable markets and the West being home to some of the most expensive ones. Despite these challenges, Lawrence Yun, chief economist for the NAR, remains optimistic about the market’s future, stating that the Federal Reserve’s anticipated rate cut later in the year should improve affordability and supply.

In response to the sluggish sales pace in April, the share of sellers cutting prices in May reached 6.4%, the highest level since 2022. This indicates a shift towards a more buyer-friendly market. Additionally, the median asking price dropped for the first time in six months, suggesting that sellers are becoming more flexible. Active inventory in April was also 30% higher compared to the same period last year, hinting at a potentially more active summer market. However, it is crucial for lower mortgage rates to entice both buyers and sellers back into the market, as noted by Hannah Jones, senior economic research analyst with Realtor.com.

Despite the current challenges posed by rising mortgage rates, there is optimism for a more balanced housing market in the coming months. The combination of increased inventory, declining prices, and potential rate cuts by the Federal Reserve could create better conditions for buyers and sellers alike. As the market continues to evolve, it will be interesting to see how these factors play out and shape the future of the real estate sector.