A rush of homes go under contract in January, but it’s unlikely to last

A sharp drop in mortgage interest rates brought homebuyers out in force in January, but rates have bounced back higher again, so the gains may be short-lived.

Signed contracts on existing homes jumped 8.1% last month compared with December, according to the National Association of Realtors. That’s the second straight month of gains. Sales, however, were still 24% lower compared with January 2022.

The so-called “pending sales” are the most current indicator of housing demand, as it can take up to two months to close on a signed sale. Closed sales in January were lower because they were based on contracts signed in November and December, when mortgage rates were higher.

And January’s jump is all about mortgage rates. After hitting a high of just over 7.3% in October, which caused sales to plummet, the average rate on the popular 30-year fixed mortgage dropped back close to 6% in January, according to Mortgage News Daily.

“Buyers responded to better affordability from falling mortgage rates in December and January,” said NAR chief economist Lawrence Yun.

But mortgage rates moved higher again in February, and the average rate stood at 6.88% as of Friday. Sales activity is likely already slowing. Mortgage applications to buy a home, which are a weekly indicator of buyer demand, have been falling for much of February.

The mortgage rate effect was also seen in sales of newly built homes in January, as those numbers from the U.S. Census Bureau are based on signed contracts as well, not closings. Builder sales jumped just over 7% compared with January. Some of that was due to incentives offered by big builders, but lower rates improved affordability, especially for buyers of entry-level homes.

Going forward, with rates higher and the supply of homes for sale still historically low, sales may not be able to continue this type of growth.

“Home sales activity looks to be bottoming out in the first quarter of this year, before incremental improvements will occur,” Yun said. “But an annual gain in home sales will not occur until 2024. Meanwhile, home prices will be steady in most parts of the country with a minor change in the national median home price.”