Mortgage Rates Drop, But Pending Home Sales Fall in January

The U.S. housing market continues to face headwinds, as mortgage rates dropped in January while pending home sales fell to an all-time low. According to the National Association of Realtors (NAR), the Pending Home Sales Index (PHSI) declined 4.6% to 70.6 in January, marking the lowest level since the NAR began tracking this metric in 2001. Year over year, pending transactions fell 5.2%.

NAR Chief Economist Lawrence Yun attributed the decline to market challenges and potentially seasonal factors, as colder months often slow homebuying activity. "It is unclear if the coldest January in 25 years contributed to fewer buyers in the market, and if so, expect greater sales activity in upcoming months," Yun said in a statement. "However, it's evident that elevated home prices and higher mortgage rates strained affordability."

Mortgage rates ranged between 6.91% and 7.04% in January, reflecting a high-interest rate environment. Fannie Mae economists project that 30-year fixed mortgage rates will remain above 6.5% through 2025 and 2026. The higher-for-longer interest rate backdrop is expected to continue, with mortgage rates easing only slightly to 6.7% by the end of 2025 (J.P. Morgan Research).

Regionally, contract signings declined across all four U.S. regions year over year. Month over month, three regions recorded losses, while the Northeast saw gains. The South, which has been the most active region for home sales in recent years, saw the largest decline (8.8%).

The divergence between mortgage rates and pending home sales can be attributed to several factors:

1. High Mortgage Rates: Elevated mortgage rates have strained affordability for many potential homebuyers, leading to a decline in pending sales.
2. Elevated Home Prices: Despite recent price reductions in certain areas, home prices remain higher than they were a year ago. This, combined with high mortgage rates, makes homeownership less affordable, further discouraging buyers.
3. Limited Inventory: While the overall inventory of homes for sale has been increasing, it is not evenly distributed across the U.S. Many areas with high demand still have relatively low for-sale inventory, limiting the potential for more home sales.

As mortgage rates decline and affordability improves, regions like the South and West are likely to see significant changes in the near future. However, the Northeast and Midwest may experience more stable housing markets due to their relatively smaller declines in home sales. The broader economic indicators, such as GDP growth and inflation, will continue to influence the housing market's performance, with higher mortgage rates and elevated home prices potentially limiting the potential for more home sales in high-demand areas.