Prices Remain High, But Payments Down A Bit

Mortgage rates are falling, which means the average U.S. housing payment is approaching its lowest point since January. But despite this, pending home sales haven’t exactly taken off. A lot of potential buyers seem to be sitting on the sidelines, waiting for rates to dip further, while others are trying to make sense of the new rules resulting from this year's lawsuit in Missouri.

As of mid-September, the median U.S. housing payment was $2,558—almost back to where it was at the start of the year and down 1.3% from this time last year. While that’s not a huge drop, it’s the second-biggest we’ve seen since May 2020, when the housing market was more of a mess than your garage during spring cleaning (and that’s saying something). The biggest drop happened two weeks prior when payments fell 1.6%.

The reason for these lower housing payments is simple: mortgage rates are going down. Both weekly and daily averages are at their lowest point in over a year, largely due to speculation that the Fed is going to cut interest rates. If home prices weren’t being so stubbornly high, those payments would be dropping even more. The median price for a U.S. home is $388,085—a 3.7% jump from last year and just a hair below July’s all-time high. High prices are sticking around thanks to a shortage of homes for sale. Inventory is down almost 30% from pre-pandemic days, and while we’re seeing more homes on the market compared to last year, the increase is slowing down.

So why hasn’t the drop in mortgage payments translated into more sales? Pending sales across the country are down 7.8% from last year, marking the biggest dip we’ve seen in about a year. High prices are partly to blame, but there’s more to the story. Some buyers are feeling a little spooked by the new association rules that rolled out in mid-August. Others are waiting for mortgage rates to drop even further before they make their move.

“One of my clients is under contract, but he’s holding off on closing until the end of the month, hoping for a better mortgage rate,” says David Palmer, an agent in Seattle. “I’ve also noticed some buyers are pressing pause until after the presidential election. People tend to get more cautious with big decisions when there’s an election looming. Right now, most of the buyers pulling the trigger are doing so because of life changes, like a divorce, growing family, or a new job.”

There are some signs that demand is picking up, though. A Homebuyer Demand Index—a measure that tracks things like tours and buyer services—is close to its highest level since May, and mortgage-purchase applications have ticked up 2% week over week.

Meanwhile, the August CPI report was slightly hotter than expected, nudging the Fed toward a 25 bps rate cut at their next meeting. But inflation is still tame enough that the Fed might surprise everyone with a 50 bps cut, especially if they’re looking to get ahead of a weakening job market. That said, mortgage rates probably won’t budge much until the Fed makes their next move.