In November, U.S. home sales were lower than expected

(Reuters) – U.S. contracts to purchase previously owned homes dropped more than expected in November. This is the latest sign of the severe impact Federal Reserve interest rate hikes have on the housing market in an effort to curb inflation.

According to the National Association of Realtors, Wednesday’s Pending Home Sales Index was lowered by 4% to 73.9, from October’s revised downwardly revised 77.0. NAR’s index was first launched in 2001. November’s reading was the lowest, with the exception of a short-lived fall in the early months due to the pandemic.

Reuters polled economists and they predicted that sales of contracts would fall 0.8%. The year-on-year decline in home sales was 37.8% for November.

Lawrence Yun, NAR Chief Economist, stated that the monthly reading of pending home sales was the second lowest in 20 years. This is because interest rates rose at the fastest pace on record this year. This has drastically reduced the number of home-buying contracts. “Failing home sales and decreased construction have impacted the wider economy.”

All four regions saw contract signings decline, with the Northeast seeing the largest drop at 7.9%. On a year-overyear basis, all four regions experienced double-digit decreases, with the West experiencing the greatest drop of 45.7%.

“The Midwest region — with relatively affordable home prices — has held up better, while the unaffordable West region suffered the largest decline in activity,” Yun said.

Signed contracts fell in general, suggesting that home sales will continue to decline after November’s 10th consecutive month of declines.

The most obvious effects of Fed interest rate increases that aim to curb high inflation and reduce demand have been felt in the housing market. According to the Fed’s preferred measure of inflation, it is nearly three times higher than its 2% target. It rose earlier in 2022 at its highest pace in 40 years.

The Fed raised rates this month by half a percent. It caps a year which saw its benchmark rate rise from nearly zero in March, to between 4.25% & 4.5% now. This was the fastest rate change since the early 1980s. Fed officials forecast that rates would climb even higher in 2023, with most likely a peak of 5%.

Contrary to other areas of the economy, many of which are yet to see a significant effect from Fed actions, the housing market has responded in close to real-time to the increase in borrowing costs engineered and implemented by the central bank.

In October, the 30-year fixed mortgage rate surpassed 7% for the first time since 2002. This is more than doubling in just nine months. This has reshaped an otherwise hot housing market, which was fuelled by historically low borrowing costs. It also prompted a rush to suburbia during the coronavirus pandemic.

Last week’s data showed that the combined annual sales of existing and new homes had dropped by 35% between January and November. This was one of the largest falls ever recorded, but it was also the slowest fall since late 2011. Last month saw a drop in single-family housing starts as well as permit issuance to a two and a half year low.

(Reporting by Dan Burns, Editing by Chizu Namiyama