Contract Signings Signal Market Improvements

CHICAGO — More home buyers signed contracts for a home purchase in September, a sign that the housing market may be on the mend after a sluggish summer.

The National Association of Realtors®’ Pending Home Sales Index  a forward-looking indicator of home sales based on contract signings — jumped by 7.4% in September compared to August, NAR reported Wednesday. Contract signings also were up 2.6% from a year ago.

“Contract signings rose across all regions of the country as buyers took advantage of the combination of lower mortgage rates in late summer and more inventory choices,” says NAR Chief Economist Lawrence Yun. Pending sales rose by nearly 10% in the West last month, followed by a 7.1% gain in the Midwest, 6.7% increase in the South, and 6.5% gain in the Northeast. “Further gains are expected if the economy continues to add jobs, inventory levels grow, and mortgage rates hold steady,” Yun says.

Sales of newly constructed and previously owned homes could rise by 10% in each of the next two years, Yun predicts, noting that “sizable pent-up housing demand” is likely to be unleashed in the coming years. First, however, the housing market must dig itself out of a rut: Existing-home sales hit a 14-year low in September as prospective home buyers pull back due to high prices.

What likely triggered more contract signings

Home buyers in September found more inventory options, which may have helped boost pending home sales last month. Housing inventory was up 23% in September compared to a year ago, although that’s still down by about 25% from pre-COVID levels, according to NAR.

The uptick in contract signings last month also came as the Federal Reserve cut its benchmark interest rate for the first time in four years. The Fed’s rate is not directly tied to mortgage rates, but the cut initially encouraged movement in the market and helped bring mortgage rates down to 6.18% in September (compared to 6.5% in August). The lower rates may have created some urgency among home buyers. The September drop in rates translated to about a $300 savings in monthly mortgage payments on a typical $300,000 mortgage compared to just a few months ago, NAR’s data shows.

That said, mortgage rates have moved upwards in recent weeks: The 30-year fixed-rate mortgage averaged 6.54% last week, according to Freddie Mac.

So, will the latest sales uptick last?

Yun believes home sales will continue to climb, particularly as home affordability improves. Here’s what he predicts for the housing market over the next two years:

• Higher home sales: “After two years of sluggish home sales in 2023 and 2024, existing-home sales are forecasted to rise,” Yun says. He predicts existing-home sales to increase to 4.47 million in 2025 and to more than 5 million in 2026.
• Slower home price appreciation: “During the next two years, expect a slower rate of growth in home prices that’s roughly in line with the consumer price index because of additional supply reaching the market,” he adds. Yun predicts the median sale price for existing homes to increase to $410,700 in 2025 and $420,000 in 2026. However, the pace of home price hikes is slowing, he says.
• Falling mortgage rates: Further helping home affordability, Yun also predicts that the 30-year fixed-rate mortgage will decrease to 5.9% in 2025. However, he says mortgage rates likely will increase to a 6.1% average by 2026.

Click here to read Yun’s full housing forecast.

© 2024 National Association of Realtors® (NAR)