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Economic Report: Leading indicator of U.S. home sales weakens for third straight month

The numbers: U.S. pending-home sales fell 2% in August, for the third straight monthly drop, according to the monthly index released Wednesday by the National Association of Realtors (NAR).

Analysts polled by the Wall Street Journal had forecast the pending home sales index to drop by 1.4%.

Contract signings fell by double-digits in all regions across the country.

Pending home sales reflect transactions where the contract has been signed for an existing-home sale, but the sale has not yet closed. 

Economists view it as an indicator for the direction of existing-home sales in subsequent months.

The fall in pending sales was preceded by a drop in mortgage application activity, which fell in the latest week.

Key details: Compared with a year earlier, transactions were down by 24.2%.

Pending sales fell in the Northeast, the Midwest, and the South, but rose in the West by 1.4%. Sales are still down year-over-year in the West by 31.3%.

This is the ninth time pending home sales have fallen in the last ten months. 

Big picture: Based on the data, housing market activity has stalled since the Federal Reserve began raising interest rates. And as mortgage rates hit 7%, it’s likely that the housing market will continue to face a tough road ahead.

And to that end, home price appreciation has slowed. The Case-Shiller index on Tuesday noted that home prices fell month-over-month in July.

While new home sales rose unexpectedly in August, most economists viewed the jump as a one-off. The data released by the government did not factor in cancellations, Redfin’s Taylor Marr told MarketWatch. 

Home buyers are backing out of contracts at a record pace, Redfin said earlier this week, especially in Sun Belt cities like Las Vegas, Phoenix, and Tampa.

Realtor.com’s data also showed that buyer pullback has accelerated in the last four months, George Ratiu, manager of economic research at Realtor.com, told MarketWatch.

In August, the company also said pending listings dropped 22% from the same time last year. 

What the realtors said: “Only when inflation calms down will we see mortgage rates begin to steady,” NAR Chief Economist Lawrence Yun said. 

The NAR expects existing-home sales to fall by 15.2% in 2022, to 5.19 million units. 

New home sales are expected to drop by 20.9% this year.

Despite the weak sales outlook, prices are still not expected to drop. Yun expects home prices to rise by 9.6% this year. But he added that home price rises will slow to 1.2% in 2023.

He also expects home sales to pick up in the back half of 2023, but still be down by 7.1% overall.

Market reaction: The Dow Jones Industrial Average
DJIA,
+0.10%

and the S&P 500
SPX,
+0.09%

were both slightly up in early trading on Wednesday. The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.846%

fell below 3.9%.

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