The housing recovery is continuing, but it’s starting to lose steam. The National Association of Realtors said today that pending home sales fell last month by 1.3% in July compared to June.
The industry group’s index is an important leading indicator for the market because it measures contract signings, the final stage before a purchase is consummated. According to Calculated Risk‘s Bill McBride, “Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in August and September.”
“The modest decline in sales is not yet concerning, and contract activity remains elevated,” said Lawrence Yun, chief economist of the National Association of Realtors. “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.”
As you can see in the chart above, pending home sales are up considerably over the last three months. But since the sharp climb in May, they’ve begun to taper off. They were down sequentially in June by 0.4% and, as noted above, by 1.3% last month.
The downturn is relatively consistent with a number of other recent reports. Earlier today, the Mortgage Bankers Association said that mortgage applications declined for the 10th time in 11 weeks, led by a 5% drop in applications to refinance existing mortgages. And last week, the Commerce Department reported that new home sales plummeted last month by 12.4% on a seasonally adjusted annual basis.
Most commentators have placed the blame on rising mortgage rates. Since the beginning of May, the rate on a 30-year fixed rate mortgage has increased from 3.35% up to 4.58%, a surge that’s unprecedented in recent history.
Companies at all stages in the mortgage market have felt the impact.
Many mortgage REITs, which invest in mortgage-backed securities, have experienced massive declines in their book values. In the most recent quarter, Annaly Capital Management, Inc. (NYSE:NLY) and American Capital Agency Corp. (NASDAQ:AGNC) watched as their book values per share dropped by 14% and 12%, respectively, compared to the first three months of the year. And not surprisingly, their share prices have responded in kind. Both are trading around their multi-year lows.
At the same time, it’s important to recognize that there remain a number of positive signals as well. Among others, existing home sales surged in July, coming in 17.2% higher than the same month last year.
In addition, the nation’s largest home improvement retailers both reported dramatically improved results for the most recent quarter. Same-store sales at The Home Depot, Inc. (NYSE:HD) climbed by 10.7% on a year-over-year basis, while those at Lowe’s Companies, Inc. (NYSE:LOW) were up by 9.6%. Both companies also notched considerably higher revenue and earnings.
Nevertheless, the latter’s chairman and CEO Robert Niblock, tempered his optimism for the remainder of the year, noting on the company’s earnings call, “The industry outlook for the second half hinges on the impact of steep increases and mortgage rates expansion over the last few months. The rate increases will likely take some sting out of the recent housing market rebound, but shouldn’t derail it as long as job gains persist, homes continue to appreciate and rates rise more gradually going forward.”
The article Concern Is Growing in the Housing Market As Pending Home Sales Fall in July originally appeared on Fool.com is written by John Maxfield.
John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Lowe’s.
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