April Sees Largest Drop In Pending Home Sales Since 2021

Pending home sales in April slid 7.7%, marking the largest decline in three years, according to a report issued by the National Association of Realtors (NAR).

The Pending Home Sales Index (PHSI), a forward-looking indicator based on contract signings, dropped to 72.3, its lowest level since the onset of the COVID-19 pandemic in April 2020. The NAR said all four U.S. regions saw month-over-month and year-over-year decreases, with the Midwest and West experiencing the sharpest declines.

According to NAR Chief Economist Lawrence Yun, the impact of escalating interest rates throughout April "dampened" home buying despite increased inventory in the market.

Regional Breakdown of Pending Home Sales

In the Northeast, the PHSI fell 3.5% from March to 62.9, a decline of 3.1% from April 2023. The Midwest saw the largest drop, with the index plunging 9.5% to 70.7, down 8.7% from a year ago.

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The South saw a 7.6% decrease, bringing its index to 88.6, 8.2% lower than the previous year. The West also recorded a drop, with the index falling 8.5% to 55.9, down 7.3% from April 2023.

"Home prices are hitting record highs, but the pace of gains should decelerate with more supply," Yun said in the report. "However, the prospect of measurable home price declines appears minimal. The few markets experiencing price declines will be viewed as second-chance opportunities for buyers to enter the market if those regions continue to add jobs."

The rise in interest rates, which hovered above 7% in April, has been the chief factor in dampening homebuyer activity, the NAR said. High rates and ongoing high home prices and low supply have created a challenging market environment. Many buyers have been sidelined due to increased competition and higher mortgage payments.

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Sellers, many of whom have seen their homes stay on the market for too long, have shifted to cutting prices to entice potential buyers. The share of home sellers slashing prices in May was at the highest level since 2022, while active inventory in April was 30% higher than in the same month last year, indicating a potential shift toward a more buyer-friendly market in the coming months.

"The impact of escalating interest rates throughout April dampened home buying, even with more inventory in the market," Yun said. "But the Federal Reserve’s anticipated rate cut later this year should lead to better conditions, with improved affordability and more supply."

Since March 2020, the Fed has increased interest rates by 5.25 percentage points to bring down inflation.

Although rates have been stable since last July, initial predictions for the year suggested up to three rate cuts of 0.25 percentage points each. However, higher-than-anticipated inflation early in the year has led the Fed to reconsider.

Currently, experts suggest there will be two rate cuts this year.

Despite current challenges, the housing market could see a more active summer season if mortgage rates decrease and inventory levels continue to rise, providing a more favorable environment for prospective homebuyers.

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