The Impact of Escalating Interest Rates on Home Sales

The real estate market saw a significant decline in signed sales contracts on existing homes in April, with a 7.7% drop compared to March. This decrease marked the slowest pace since April 2020, reflecting the impact of escalating interest rates on home sales.

The average rate on the 30-year fixed mortgage surged from around 6.9% at the end of March to 7.5% by the end of April. This rapid increase had a profound effect on sales, as buyers reacted to the higher mortgage rates in real time. With home prices on the rise and supply remaining low, the jump in rates led to a slowdown in home buying activity.

Sales were down across all regions of the country, but the Midwest and West experienced the sharpest declines. The Midwest, known for its affordability, and the West, known for its high-priced markets, were particularly impacted by the rising interest rates. However, Lawrence Yun, chief economist for the NAR, remains optimistic that the impact on home prices will be minimal in most markets.

In response to the slower sales pace in April, the share of sellers cutting prices in May increased to 6.4%, reaching the highest level since 2022. This adjustment in pricing reflects the changing market conditions and the need for sellers to attract buyers. Additionally, active inventory in April was 30% higher than in April 2023, indicating a potentially more active summer market ahead.

While the current market conditions pose challenges for both buyers and sellers, there is anticipation for better conditions ahead. The Federal Reserve’s expected rate cut later this year is forecasted to improve affordability and increase supply, which could positively impact home sales. Lower mortgage rates are also seen as crucial in revitalizing the market and attracting buyers and sellers back into the real estate arena.

The real estate market is experiencing a period of adjustment in response to escalating interest rates. While the impact of these rate hikes has dampened home buying activity, there is optimism for a turnaround with improved market conditions and lower mortgage rates on the horizon. As buyers and sellers navigate through these changing dynamics, adaptability and strategic decision-making will be key in achieving success in the ever-evolving real estate landscape.