Pending Sales of Existing Homes in U.S. Dropped 1.3% in July

Fewer Americans signed contracts in July to buy previously owned homes, a sign that rising mortgage rates are starting to slow momentum in the housing market.

The index of pending home sales dropped 1.3 percent, the most this year, after a 0.4 percent decrease in June, figures from the National Association of Realtors showed today in Washington. Economists forecast no change in the gauge from the month before, according to a median estimate in a Bloomberg survey.

Mortgage rates at a two-year high and a limited number of existing homes are pushing some prospective buyers out of the market, threatening to slow the pace of the recovery in real estate. Improvements in employment and income growth would help provide additional fuel for housing, which has been a source of strength for the economy.

“There’s been some signs that higher mortgage rates have negatively impacted home purchase decisions over the past six weeks or so,” said Ryan Wang, an economist at HSBC Securities USA Inc. in New York, who correctly forecast the decline in pending sales. “The fact that the uptrend appears to have been curtailed by higher mortgage rates is somewhat of a concern.”

Estimates in the Bloomberg survey of 38 economists for pending home sales ranged from a decline of 3 percent to an increase of 5.3 percent.

The Standard & Poor’s Supercomposite Homebuilding Index declined 1.2 percent at 10:13 a.m. in New York. The S&P 500 rose 0.2 percent to 1,633.23 after dropping to an eight-week low yesterday amid concern over a possible military strike against Syria.

The Realtors’ report showed purchases increased 8.6 percent from July 2012 on an unadjusted basis.

Sales Index

The pending sales index was 109.5 on a seasonally-adjusted basis, the lowest in three months. A reading of 100 coincides with the average level of contract activity in 2001 and “historically healthy” home-buying traffic, according to the NAR.

“The modest decline in sales is not yet concerning, and contract activity remains elevated, with the South and Midwest showing no measurable slowdown,” the group’s chief economist Lawrence Yun said in a statement. “However, higher mortgage interest rates and rising home prices are impacting monthly contract activity in the high-cost regions of the Northeast and the West.”

By Region

Three of four regions showed a decrease from a month earlier, led by a 6.5 percent drop in the Northeast. They fell 4.9 percent in the West and 1 percent in the Midwest. Pending sales climbed 2.6 percent in the South.

Last week, the Realtors’ group said sales of previously owned homes jumped in July to the second-highest level in more than six years as buyers rushed to lock in mortgage rates before they increased any more. Purchases advanced 6.5 percent to a 5.39 million annual rate, the strongest since a government tax credit temporarily boosted demand in November 2009.

The group said it expects existing-home sales to reach about 5.1 million this year and 5.2 million in 2014. Some 4.7 million previously owned homes were sold in 2012.

While rising mortgage rates may initially stimulate demand, the appeal may wane as higher costs push potential buyers out of the market. The average rate for a 30-year fixed mortgage was 4.58 percent in the week ended Aug. 22, the highest level since July 2011.

At the current rate, the monthly payment on a $250,000 30-year loan is about $1,279. That compares with a $1,096 payment in November, when the average rate reached a record low of 3.31 percent.

Furniture Sales

The recovery in the housing market has aided the economic expansion as buyers look to fill their homes with furniture and appliances. La-Z-Boy Inc., a Monroe, Michigan-based maker of living-room recliners, reported fiscal first-quarter earnings that more than doubled from the year before, topping analysts’ estimates.

“With housing and consumer confidence trending upward, we are optimistic about the future of La-Z-Boy,” Chief Executive Officer Kurt Darrow said on an Aug. 21 conference call. The wood portion of the furniture industry will be the “biggest beneficiary as housing continues to strengthen,” he said.

Economists consider pending home sales a leading indicator because they track contract signings. Existing home sales are tabulated when a contract closes, usually a month or two later.

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