Existing-Home Sales Slump as Mortgage Rates Rise


September Sales Expected to Hit Lowest Level in Over a Decade

The upcoming release of September’s existing-home sales data is anticipated to reveal a significant slump in the housing market as mortgage rates continue to rise. This news comes as a blow to an already struggling industry, with further challenges on the horizon.

Rising Rates Impact Market Sentiment and Mortgage Applications

For weeks, rising mortgage rates have had a detrimental effect on various aspects of the housing market, including consumer sentiment and mortgage applications. Freddie Mac’s weekly gauge of mortgage rates surpassed 2022’s high of 7.08% in mid-August and has been steadily climbing since. Last week, the average mortgage rate reached 7.57%, the highest it has been since late 2000.

August Sales Already Hit by Rising Rates

August witnessed a significant decline in home sales, plunging to the lowest level since January, according to the National Association of Realtors. However, due to the time it takes for home purchases to finalize, the reported sales figures likely represent properties that went under contract earlier in the summer. This means that the full impact of mortgage rates surpassing 7%, and their continuous climb into mid-October, has yet to be captured in the monthly report.

With the release of September’s report expected on Thursday, economists polled by FactSet anticipate another 3.5% drop in existing-home sales, reaching the lowest level since October 2010. If these expectations come to fruition, it will mark the most significant month-over-month decline since November 2022 when rising rates similarly suppressed purchasing activity.

Home Buyers Feeling the Pressure

Primary data already indicates that higher rates are weighing heavily on prospective home buyers. In Fannie Mae’s September housing market sentiment survey, only 16% of respondents believed it was a favorable time to buy a house. This reading matches the lowest share recorded in the history of this question, which dates back to 2010 (previously seen in October and November 2022).

This bleak sentiment translates into a notable reduction in mortgage applications, a vital indicator of future home sales. The Mortgage Bankers Association’s weekly release of home loan application volume has remained close to multidecade lows as fixed mortgage rates continue to rise.

In summary, the housing market is facing significant challenges as mortgage rates surge. Sales have already suffered, and the impact is expected to worsen when September’s data is released. Home buyers are feeling the pressure, resulting in a decline in mortgage applications. The industry awaits further developments with mounting caution.

Housing Market Sentiment Turns Pessimistic

The housing market isn’t the only party feeling down these days – builders are also experiencing a sour mood. According to the National Association of Home Builders, industry sentiment turned pessimistic in September after four months of neutral or optimistic readings. Economists predict that the October result will reveal another pessimistic reading when it is released on Tuesday.

Rocky Run for Home Builder Investors

Investors in home builders have faced a turbulent time recently with the rise in Treasury yields and mortgage rates. The SPDR S&P Homebuilders ETF (XHB) and the iShares U.S. Home Construction ETF (ITB), two exchange-traded funds tracking the home builders and related industries, have seen declines of about 12% and 14% over the past six weeks. However, both ETFs have still delivered a strong return of approximately 25% year to date.

Positive Outlook for Builders in 2024

Despite recent underperformance due to rising mortgage rates impacting buyer demand, JPMorgan analyst Michael Rehaut believes there is further upside for the industry in 2024. In a recent note, Rehaut stated his expectation of double-digit growth in earnings per share for larger-cap builders, despite headwinds such as the recent increase in interest rates and anticipated economic slowing. Rehaut reaffirmed his Overweight ratings on PulteGroup (PHM), Toll Brothers (TOL), Meritage Homes (MTH), and Taylor Morrison Home (TMHC).

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