The numbers: Existing-home sales decreased 2.7% between February and March, dropping to a seasonally adjusted, annual rate of 5.77 million, the National Association of Realtors said Wednesday. It was the second consecutive month in which sales fell. Compared to a year ago, sales were down 4.5%.
Despite the decline, existing-home sales came in ahead of expectations. Economists polled by MarketWatch had projected existing-home sales to settle at 5.75 million.
“The housing market is starting to feel the impact of sharply rising mortgage rates and higher inflation taking a hit on purchasing power,” Lawrence Yun, chief economist for the National Association of Realtors, said in the report. “Still, homes are selling rapidly, and home price gains remain in the double-digits.”
Yun now predicts that home sales will contract by 10% in 2022, as surging mortgage rates curb home-buying demand and home-price growth.
Key details: The inventory of homes for sale rose on a monthly basis between February and March, but was down 9.5% from a year ago.
Expressed in terms of the months-supply, there was a 2-month supply of homes for sale in March. A 6-month supply of homes is generally viewed as indicative of a balanced market.
The median price for an existing home was $375,300, up 15% from March 2021. Homes remained on the market for 17 days on average, and a staggering 87% of the homes sold in March had been on the market for less than a month.
Regionally, every part of the country witnessed a decline in home sales in March, except for the West, where sales held steady on a monthly basis. The largest decline percentage-wise occurred in the Midwest, where sales slipped 4.5%.
The big picture: As the National Association of Realtors has predicted, the past two months’ worth of sales declines are likely just the beginning. Mortgage-application data suggests a somber picture for home sales in the coming months. Applications for loans used to buy homes dropped sharply in February and have only moved lower since.
Rising mortgages rates are putting a significant strain on many home buyers’ budgets, reducing the size of the home they can afford to buy just as the spring home-buying season has gotten underway.
Looking ahead: “Housing market momentum is expected to slow as rates continue to rise, possibly at a faster pace, while elevated prices have eroded affordability,” Michael Gregory, deputy chief economist at BMO Capital Markets, wrote in a research note.
“Inventories are close to all-time lows, boosting prices. Combined with rising mortgages rates, affordability is deteriorating,” Rubeela Farooqi, chief U.S. economist for High Frequency Economics, wrote in a research note.
“Is there a bubble building in the new home market? It isn’t here yet, but the indicators need to be watched closely,” said Joel Naroff, president and chief economist at Naroff Economics. “The saving factor is that the existing home market, which comprises over eighty-eight percent of the sales, has few homes on the market.”
“Bear in mind, however, there are still home shoppers with rate locks granted months ago who are under considerable pressure to buy before their locks expire,” said Chris Low, chief economist at FHN Financial, in a note. “The fact buyers can lock in rates while looking is one reason home sales usually pop before dropping when there is a sudden rise in rates.”
Market reaction: The Dow Jones Industrial Average and the S&P 500 Index both moved higher in morning trades on Wednesday, in spite of the news on the housing market.