Buyers are back in the housing market, but they are still having a hard time finding what they want and what they can afford.
The pending home sales index from the National Association of Realtors rose 1.6% in August, compared with July, and was 2.5% higher year over year. This index measures signed contracts to buy existing homes. August's gain reversed a slump in July and was likely fueled by falling mortgage rates.
"It is very encouraging that buyers are responding to exceptionally low interest rates," said Lawrence Yun, NAR's chief economist. "The notable sales slump in the West region over recent years appears to be over. Rising demand will reaccelerate home price appreciation in the absence of more supply."
Regionally, pending home sales in the Northeast rose 1.4% monthly and were 0.7% higher than a year ago. In the Midwest, sales increased 0.6% monthly and were 0.2% higher annually. Sales in the South increased 1.4% monthly and 1.8% annually, and in the West sales jumped 3.1% monthly and were 8.0% higher compared with August 2018.
Mortgage rates fell throughout the summer with the deepest dip in August, when these buyers were out applying for loans and signing contracts. The average rate on the 30-year fixed was up around 4.2% in early May but fell to around 3.5% by August, according to Freddie Mac. That gave buyers significantly more purchasing power.
Home prices are still gaining, and those gains are now starting to accelerate, due to the lack of supply of homes for sale. The price pain is worst on the lower end of the market, where supply is leanest. Most of the sales action is now happening on the higher end of the market and also in the new construction market, which is comparatively more expensive.
Sales of newly built homes, which are also measured by signed contracts, jumped unexpectedly in August, up 18% annually. The supply of newly built homes also fell and is now lower than a year ago. That is the first annual decrease in new construction inventory all year. Builders are clearly benefiting from both lower interest rates and the lack of supply in the existing home market.