Pending Home Sales Hit 6-Year High As Rising Mortgage Rates Propel Home Buyers

LARKSPUR, CA - FEBRUARY 21:  A sale pending si...

By Morgan Brennan

Looks like those rising mortgage interest rates are beginning to affect home buying. Pending sales of previously owned homes surged to six-year highs, according to the National Association of Realtors, as more buyers jump into the market looking to lock in on home prices and mortgage rates that have begun upward marches expected to continue.

Pending home sales, which represent the number of contracts signed but not yet closed, ratcheted up 6.7% in May from a month earlier and 12.1% higher than a year ago. May’s index reading of 112.3 marks the first time contract activity has grown at this rate since December 2006, when it hit 112.8.

Pending sales are a forward-looking indicator for the housing market since signed contracts offer an early outlook on the number of existing home sales coming within the next one to two months, the typical time frame it takes a deal to close. Economists have been eager to see May’s numbers to better gauge how changing market conditions could be beginning to affect buyer behavior and more so, the housing recovery as a whole.

The biggest issue currently facing housing is mortgage rate increases. This week the 30-year fixed mortgage jumped to 4.46% rate – the largest weekly increase in 26 years, according to Freddie Mac, from 3.93%. That’s up more than 100 basis points – meaning more than a full percentage point – from the 3.35% rate logged mere weeks ago in early May. While still very low by historic standards, that 4.46% rate, compared to a week earlier, translates into an extra $31 in monthly payments for every $100,000 taken out in financing; compared to early May, it’s an extra $63 and change for every $100,000 taken out.

The dramatic jump, fueled by investor activity tied to the anticipated winding down of the Federal Reserve’s $85 billion-per-month bond buying program, makes borrowing costs more expensive and chips away at the high level of home affordability that has been fueling the housing recovery.

Real estate experts have wondered in recent weeks whether rising rates could spur an uptick, short-term at least, in sales, as on-the-fence prospective buyers jump into the market to lock in on rates before they climb further. The bump in May’s pending homes numbers might be reflecting the start of this. “Even with limited choices, it appears some of the rise in contract signings could be from buyers wanting to take advantage of current affordability conditions before mortgage interest rates move higher,” explained Lawrence Yun, chief economist of the National Association of Realtors. “This implies a continuation of double-digit price increases from a year earlier, with a strong push from pent-up demand.”

As inventory levels have dwindled over the past year, the growing ranks of buyers have helped propel dramatic price increases in many of the country’s largest markets. On Thursday, the Realtors association upgraded its price forecast for 2013: Yun now expects the national median existing home price to rise more than 10% this year. If realized, it represents the largest yearly increase since 2005, the height of the housing bubble.

Home sales have been climbing for the better part of two years. The number of pending sales has grown year-over-year consecutively for the past 25 months, according to NAR.  In May, sales of existing homes – meaning closed contracts for previously owned homes– totaled an annual rate of 5.18 million. It was the first time home sales broke above the five million mark in three and a half years, after the First Time Home Buyer tax credits temporarily boosted housing activity. NAR expects sales to increase as much as 9% throughout 2013, which would translate into slightly more than five million homes sold (a number last seen in 2007).

But for all of the Realtors’ robust projections, as rates rise – and economists believe they will continue to do so, albeit unevenly – that increased cost of borrowing could still cut into the blossoming housing recovery. Though higher rates aren’t likely to derail the rebound, they could slow it, weighing on the hefty double-digit rate of appreciation underway as buyers qualify for lower principal amounts moving forward and sluggish economic growth keeps income levels relatively stagnant.

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