Home Sales Slowing as Mortgage Rates Continue to Rise

Key Takeaways:

• Durable goods orders declined 2.2 percent in February, the largest monthly decline since the beginning of the pandemic, according to the Census Bureau. This was driven partially by a 30.4 percent drop in nondefense aircraft orders, but even when excluding transportation equipment durable goods orders were down 0.6 percent. Core capital goods orders (nondefense excluding aircraft) declined 0.3 percent, its first monthly decline in a year.  Durable goods shipments were flat over the month, while unfilled orders and inventories of durable goods increased 0.4 percent.
• New single-family home sales declined 2.0 percent to a seasonally adjusted annualized rate (SAAR) of 772,000 in February, according to the Census Bureau. The number of new single-family homes available for sale moved up 2.3 percent to 407,000 units, moving the months’ supply up by two-tenths to 6.3, though this was due almost entirely to a 7.1 percent gain in the number of new homes for sale that have not yet been started, which reached a record high of 106,000 units.
• The National Association of REALTORS® Pending Home Sales Index, which records contract signings of existing homes and typically leads closings by one to two months, fell 4.1 percent to 104.9 in February. This followed a decline of 5.8 percent in January.

Forecast Impact:

Durable goods orders were weaker than expected and the underlying details suggest continued disruptions to auto manufacturing, as both orders and shipments for motor vehicles and parts fell in February. Auto production issues will likely be exacerbated by the Russian invasion of Ukraine disrupting the markets for key materials, posing an upside risk to our CPI forecast and a downside risk to our consumption forecast. However, we continue to expect Q1 business investment to accelerate, as durable goods shipments are still consistent with annualized equipment investment in excess of 10 percent, even with the slight pullback in February. On balance, this report is unlikely to significantly alter our forecast.

In housing, the new home sales figure was below our expectations and will likely lead to a downward revision to our near-term new home sales forecast. While we expect the ongoing lack of existing homes for sale will still support demand for new homes this year, the slowdown in sales over the past two months may end up reflecting a turning point going forward given the recent rapid rise in mortgage rates, hitting 4.4 percent as of the latest weekly survey from Freddie Mac.  In addition, pending sales declined for a fourth consecutive month and are at their lowest level in more than a year. We’ve suspected that many homebuyers rushed to complete their purchases around the turn of the year to get ahead of an expected increase in rates; that surge in sales is therefore now likely being given back. Additionally, February pending sales would have occurred with mortgage rates roughly 50 to 70 basis points lower than the most recent reading, so the full effects of the recent mortgage rate increases have not yet been revealed in this data. We had previously forecast a decline in existing sales going forward, but we are likely to downwardly revise our home sales outlook for 2022. 

Nathaniel Drake
Economic and Strategic Research Group
March 25, 2022

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