Home sales falter on rising interest rates

Aug. 28, 2013, 2:46 PM UTC

By Diana Olick

Signed contracts to buy existing homes faltered in July, as home buyers faced significantly higher interest rates along with rising home prices. The pending home sales index from the National Association of Realtors fell 1.3 percent from June but is still 6.7 percent higher than July 2012. These contracts indicated lower home sales closings in August and September.

"The modest decline in sales is not yet concerning, and contract activity remains elevated, with the South and Midwest showing no measurable slowdown," NAR 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."

Pending home sales fell in three out of four regions in July. Contract activity month to month was down 6.5 percent in the Northeast, down 4.9 percent in the West and off 1 percent in the Midwest. Activity was higher by 2.6 percent in the South.

The figures come on the heels of very weak sales of newly built homes in July, down 13 percent from June, according to the U.S. Census. Analysts blamed higher interest rates and some expected existing home sales to fall even further than this latest reading. Interest rates are about a full percentage point higher today than in May.

Mortgage applications had been lower for much of the summer, and refinances continue to fall, but applications to purchase a home rose 2 percent last week from the previous week, according to the Mortgage Bankers Association.

This, even as the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances of $417,000 or less increased to 4.8 percent, the highest since April 2011. They are still down 6 percent in the past month. Mortgage rates, however, have been moving lower this week on weak economic data.

Higher home prices could also be hurting potential sales, as very low inventories continue to cause bidding wars from coast to coast. Inventories of existing homes are down significantly in most of the nation's major housing markets.

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San Francisco, for example is seeing some of the highest home price appreciation, as listings were down 29 percent in July year over year, according to the California Association of Realtors.

"More homes clearly need to be built in the West to relieve price pressure, or the region could soon face pronounced affordability problems," Yun said.

Single family housing starts were down 2.2 percent in July month to month, as home builders still struggle to find finished lots and skilled labor. Underlying demand is running nearly twice the rate of housing completions, according to IHS Global Insight. Some home builders admit they are slowing production in order to gain pricing power.