The National Association of Realtors released January’s Pending Home Sales report this morning, which measures signed purchase contracts as opposed to finalized sales. As such, it’s considered to be an advance indicator of Existing Home Sales, and that’s generally proven to be the case over time. It also means the pending sales data can be a bit more volatile.
In today’s data, that volatility expressed itself in the form of the biggest month-over-month decline in 11 months. The index dropped by 5.7% to a level of 109.5. December’s level was revised slightly lower from 117.7 to 116.1.
Despite the losses, if we look beyond the post-covid sales surge, current levels are still quite strong in the context of the past 15 years.
That’s all well and good for the month of January, but where do we go from here? First off, the uniqueness of the present housing and mortgage market situations is a required disclaimer at the top of any discussion of the sales outlook. We’ve often pointed out that, although rising rates do tend to put downward pressure on sales, they don’t singlehandedly derail a strong real estate market.
Unfortunately, rising rates are joined by a still-appalling inventory environment as well as an ongoing price surge that continues to create affordability issues across the country. NAR’s chief economist shared the following comments in today’s release:
With inventory at an all-time low, buyers are still having a difficult time finding a home. Given the situation in the market – mortgages, home costs and inventory – it would not be surprising to see a retreat in housing demand – Lawrence Yun, NAR
Yun added that geopolitical risks could drive safe haven demand for Treasuries which could put some downward pressure on mortgage rates. Anything’s possible, but it’s important to bear in mind that the typical correlation between Treasury yields and mortgage rates is basically out the window lately, not to mention the fact that the bond market has seen only a limited influx of safe haven demand from geopolitical risks and the flight to safety out of the stock market.
The following chart shows the relative performance between mortgage backed securities or MBS (the bond-like instruments that primarily determine mortgage rates) and US Treasuries. The higher the green line, the less mortgage rates can keep pace with Treasury yield improvements. This underperformance is occurring for several reasons, but the biggest is the shift in the Fed’s policy outlook. Specifically, the Fed is buying fewer and fewer MBS each month and will likely begin shrinking its overall MBS holdings with a matter of months.
All that to say, we wouldn’t count on geopolitical drama to translate to a significant drop in mortgage rates. That doesn’t mean a significant drop couldn’t happen–merely that it would need to happen for another reason. Such reasons are many months in the future unless something truly catastrophic were to happen (catastrophic enough that even the biggest fans of low rates would prefer to avoid it).
Back to the pending sales impact… The good news is that the market tends to do a very good job of pricing in expectations for future Fed policy changes in advance. A good portion of that process has already taken place. There won’t be a huge new spike in rates simply because the Fed does what it said it was going to do in the coming months. If prices cool off a bit, inventory improves, and rates stabilize, there’s a high enough level of demand in this marketplace that the home sales outlook might be better than many forecasters expect.
Here is MND’s interactive chart for this data: