Last week, we wrote about how the housing market had slowed significantly, most likely due to a sudden bump in mortgage rates. At that time, the data for August wasn’t yet available. Well, now the numbers are in, and they confirm our suspicions. August was indeed a lousy month for home sales.
The best way to measure the velocity of real estate sales in real time is to look at something called “new pendings.” New pendings (or new contracts) are created when an offer is accepted on a property. This is different from “homes sold,” which is when a house goes to settlement.
The number of new contracts is a more accurate reflection of how current market conditions are affecting buyers and sellers, because it can take up to 60 days or more for a house to go to settlement, making the date a home is sold a trailing indicator. For example, you might see the number of homes sold go up in April and May, but the contracts on those homes were actually written in February and March.
How do these statistics react to changes in mortgage rates? As you might expect, there’s an inverse relationship. When mortgage rates go up, the number of new contracts written goes down. We saw a clear example of this during the past summer. During the first half of 2013, interest rates on a 30-year fixed rate loan remained fairly steady, hovering around 3.5 percent. Then, as we mentioned last week, the Federal Reserve Bank started talking about tighter money policies and mortgage rates that were 3.5 at the end of May suddenly shot up to 4.5 by the end of June.
The figures on new contracts written clearly shows the corresponding deceleration of the housing market. For April 2013, the number of new contracts written in Anne Arundel County was up more than 21 percent versus April 2012. In Baltimore County, new contracts were up more than 20 percent for the same period. May was also strong, up 20 percent for Anne Arundel and 16 percent for Baltimore.
But when we got into June, you could start to see the effect of rising rates and the ensuing slowdown. By August, buyers were spooked, and the number of new contracts written slowed to a snail’s pace. In Anne Arundel, they were up by only 4.7 percent against year ago, and in Baltimore County, new contracts had gone nearly flat, up just 1.3 percent.
But don’t worry, we have some reasons to believe that the buyers will be back.
First, the fall is generally a good selling season, with people thinking about making a move looking to get settled before the holidays. Second, buyers will progressively become more accustomed and comfortable with the higher mortgage rates. Third, launching missiles into Syria is something that can upset the markets and make buyers sit on their hands. Fortunately, it looks like we’ve avoided that little adventure for the time being. And fourth, mortgage rates might actually come down a bit as the Federal Reserve opens the money spigot again in response to the recent jobs report, which showed that the economy is still very weak. Especially if mortgage rates get back into the 3’s, you might see buyers really pile in, not wanting to miss the boat for a second time.
In sum, when interest rates go up, home sales (at least in the short-term) go down. But for now, our best guess is that we’ll all go sideways over the next couple of months.
Bob and Donna McWilliams are practicing real estate agents in Maryland with more than 25 years of combined experience. Their email address is McWilliams@BobDonna.com.