Fewer Americans signed contracts in July to buy previously owned homes, a sign that rising mortgage rates are starting to slow momentum in the housing market.
The index of pending home sales dropped 1.3%, the most this year, after a 0.4% decrease in June, figures from the National Association of Realtors showed today in Washington. Economists forecast no change in the gauge from the month before, according to a median estimate in a Bloomberg survey.
Mortgage rates at a two-year high and a limited number of existing homes are pushing some prospective buyers out of the market, threatening to slow the pace of the recovery in real estate. Improvements in employment and income growth would help provide additional fuel for housing, which has been a source of strength for the economy.
“Clearly the recent uptick in interest rates is having a more significant impact on purchase decisions in the housing space,” Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit, said before the report. “It takes a little bit of wind out of the expected pace of the housing sector recovery.”
Estimates in the Bloomberg survey of 38 economists for pending home sales ranged from a decline of 3% to an increase of 5.3%.
The Standard & Poor’s Supercomposite Homebuilding Index declined 1.1% at 10:05 a.m. in New York. The S&P 500 rose less than 0.1% to 1,631.01 after dropping to an eight- week low yesterday amid concern over a possible military strike against Syria.
The Realtors’ report showed purchases increased 8.6% from July 2012 on an unadjusted basis.
The pending sales index was 109.5 on a seasonally-adjusted basis, the lowest in three months. A reading of 100 coincides with the average level of contract activity in 2001 and “historically healthy” home-buying traffic, according to the NAR.
“The modest decline in sales is not yet concerning, and contract activity remains elevated, with the South and Midwest showing no measurable slowdown,” the group’s chief economist Lawrence Yun said in a statement. “However, higher mortgage interest rates and rising home prices are impacting monthly contract activity in the high-cost regions of the Northeast and the West.”
Three of four regions showed a decrease from a month earlier, led by a 6.5% drop in the Northeast. They fell 4.9% in the West and 1% in the Midwest. Pending sales climbed 2.6% in the South.
Last week, the Realtors’ group said sales of previously owned homes jumped in July to the second-highest level in more than six years as buyers rushed to lock in mortgage rates before they increased any more. Purchases advanced 6.5% to a 5.39 million annual rate, the strongest since a government tax credit temporarily boosted demand in November 2009.
The group said it expects existing-home sales to reach about 5.1 million this year and 5.2 million in 2014. Some 4.7 million previously owned homes were sold in 2012.
While rising mortgage rates may initially stimulate demand, the appeal may wane as higher costs push potential buyers out of the market. The average rate for a 30-year fixed mortgage was 4.58% in the week ended Aug. 22, the highest level since July 2011.
At the current rate, the monthly payment on a $250,000 30- year loan is about $1,279. That compares with a $1,096 payment in November, when the average rate reached a record low of 3.31%.
The recovery in the housing market has aided the economic expansion as buyers look to fill their homes with furniture and appliances. La-Z-Boy Inc., a Monroe, Michigan-based maker of living-room recliners, reported fiscal first-quarter earnings that more than doubled from the year before, topping analysts’ estimates.
“With housing and consumer confidence trending upward, we are optimistic about the future of La-Z-Boy,” Chief Executive Officer Kurt Darrow said on an Aug. 21 conference call. The wood portion of the furniture industry will be the “biggest beneficiary as housing continues to strengthen,” he said.
Economists consider pending home sales a leading indicator because they track contract signings. Existing home sales are tabulated when a contract closes, usually a month or two later.