Pending Home Sales Index Drops to Record Low of 66 as Mortgage Rates Hit 7.4%

The National Association of Realtors' pending home sales index, a measure of home purchase contract signings that precede a closed sale by a month or two, dropped to a seasonally adjusted level of 66 in September, its lowest on record dating back to 2001. The level was 7.3% lower than in August and 11.3% lower than a year earlier. Economists polled by Reuters had expected a 0.5% monthly decline, and contracts fell in all four regions, according to the report. Mortgage rates near 7.4% are keeping buyers on the sidelines.

The September numbers

The index counts signed purchase contracts that have not yet closed, so they usually show up as closed sales a month or two later. It is set so that 100 equals the 2001 average, which puts September about 34% below that baseline, by our calculation. NAR chief economist Lawrence Yun said conditions weakened because of rapidly rising mortgage rates. One data provider put the annual decline at 12.6% rather than 11.3%, so figures for the year-over-year change differ by source; we use the 11.3% reported by Reuters.

Every region fell

The regional breakdown, as reported by Barron's, shows the West and South taking the biggest hits and the Northeast the smallest.

Mortgage rates are the cause

The Freddie Mac average rate on a 30-year fixed loan was 7.40% in its latest weekly reading, its highest level in nearly three years, according to Reuters. By our calculation that is about 1.1 percentage points above a year earlier, and roughly 1.3 points above January. Mortgage rates follow Treasury yields, which have climbed sharply in recent months. Reuters links the rise in yields to inflation pressure tied to the U.S.-Israeli war with Iran. We covered the move in the bond market in our reports on the 10-year Treasury yield and on global bond yields.

What it means for homebuilder stocks

The data confirms a slowdown that homebuilder stocks have already priced in to some degree. According to Barron's, citing Dow Jones Market Data, the iShares U.S. Home Construction ETF (ITB) is down 11.1% so far this year and is on track for its worst year since 2022. Barron's quote also showed the fund up about 2.6% on Tuesday, so the record-low report did not send it lower in early trading, though we cannot verify intraday moves. Barron's argues the 10-year Treasury yield, one of the main drivers of mortgage rates, is the best guide to where these stocks go next.

The shock to closed sales is still coming

Because signed contracts convert to closings with a lag, the September drop has not yet shown up in closed sales of existing homes. Barron's expects October existing-home sales, due in November, to come in lower than September's, with the open question being how much lower. A contract index at a record low suggests the weakness will run through the next few closing reports.