Homebuyers in every corner of the country retreated from the market heading into the fall as rising mortgage rates drained their purchasing power.
Pending home sales for August plunged 7.1% from the month before, according to the National Association of Realtors, down from the 0.9% monthly increase recorded in July. The result was far worse than the 1.0% decline that Bloomberg economists had estimated and was widespread. Every region recorded a monthly and year-over-year drop.
On a yearly basis, pending transactions were down by 18.7%.
The drop in the index, a leading indicator of the housing market’s health, further highlights how housing activity has been smothered by expensive mortgages, rising prices, and low inventory. Seasonality may also have played a role.
"Mortgage rates have been rising above 7% since August, which has diminished the pool of homebuyers," Lawrence Yun, NAR chief economist, said in a statement. "Some would-be home buyers are taking a pause and readjusting their expectations about the location and type of home to better fit their budgets."
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Contract signings in the Northeast declined 0.9% from the last month and were down 18.2% from August 2022 levels. Pending sales also dropped 7.0% in the Midwest and fell 19.1% from a year ago.
The South recorded a monthly dive of 9.1% in pending sales in August while also plunging 17.6% from the previous year. Activity in the West receded 7.7% and was down 21.4% from August 2022.
"The drop in pending home sales is due to a combination of higher mortgage rates and seasonal factors, with sales typically falling this time of year and the recent increases in rates have lowered mortgage demand and housing supply," Orphe Divounguy, senior economist at Zillow, told Yahoo Finance.
Elevated mortgage rates have landed a one-two punch on supply and demand.
Higher rates have robbed homeowners of the incentive to sell their houses and left buyers with few options in the resale market.
"Buyers simply can’t buy what’s not for sale," Divounguy said.
In August, the average rate on the 30-year fixed mortgage surged to 7.23%, the highest rate point since June 2001 when rates were at 7.24%, according to Freddie Mac. Rates have stayed above 7% for seven weeks, squeezing affordability. The latest reading for the average rate on the 30-year fixed-rate mortgage climbed to 7.31% as of September 28, per Freddie Mac.
Higher mortgage rates have also hit demand with many buyers scared off by sticker shock.