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Pending home sales drop more than expected in September

Signed contracts to buy existing homes in the U.S. plunged more than expected in September as expensive borrowing costs push more entry-level homebuyers out of the market.

The National Association of Realtors’ index of pending home sales dropped 31% in September compared with the same month a year ago, according to data released Friday. On a monthly basis, pending home sales plummeted 10.2% — far more than the 3.8% decline projected by Econoday's consensus.

The measure, a leading indicator of the housing market's health, underscores how much activity has reversed this year with more buyers keeping to the sidelines and many would-be sellers thinking twice about listing.

“Persistent inflation has proven quite harmful to the housing market,” said NAR Chief Economist Lawrence Yun. “The Federal Reserve has had to drastically raise interest rates to quell inflation, which has resulted in far fewer buyers and even fewer sellers.”

Contract signings decreased in every region from the previous month. Pending sales decreased 16.2% in the Northeast, 11.7% in the West, 8.8% in the Midwest, and 8.1% in the South. Sales under contracted retracted by double-digit percentages in each region versus a year ago.

These figures occurred during the same month the Federal Reserve raised its benchmark interest by 75 basis points for the third straight month in September – the most aggressive series of hikes since 1994. The Fed has raised rates five times this year, bringing benchmark rate from near zero to between 3% and 3.25%. The central bank is expected to raise rates by another 0.75 percentage points next week.

Those moves have triggered major consequences in the housing market.

The average rate for a 30-year fixed mortgage topped 7% for the first time in 20 years this week, according to Freddie Mac. While home prices softened, they are still too high to appeal to many buyers, who are facing skyrocketing mortgage rates.

"For many buyers, especially first-timers, higher borrowing costs mean that a home purchase may be postponed until next year," George Ratiu, senior economist at Realtor.com, said in an email in response to the report. "Prices have been declining from their summer peak, but not fast enough to compensate for much-higher rates."

For instance, the monthly mortgage payment on a median-priced home with a 20% down payment is $1,000 higher than last year, according to Ratiu. And as inflation eats into people's paychecks, buyers’ purchasing power is down more than $100,000 during the same period.

ajcasanova via Getty Images

“The new normal for mortgage rates could be around 7% for a while,” Yun said. “Only when inflation is tamed will mortgage rates retreat and boost home purchasing power for buyers.”

Other housing data continues to signal a slowdown in the market. Sales of new single-family homes dropped 10.9% in September from the previous month. Year to date, sales are down almost 14%. Home builder confidence has also declined 10 straight months.

Many sellers, meanwhile, are choosing not to sell because they don’t want to give up the low rates they locked in during the past two years. Those who do list face tougher conditions.

About 64,000 home purchase agreements fell through in August, which marks the second month in a row that cancellations have exceeded 15%, according to real estate brokerage Redfin. And 1 in 5 listings have had their prices reduced, Ratiu said.

"Particularly as we go into the colder months," Ratiu said, "sellers who hope to close a deal before year’s end should expect more flexibility in negotiations."

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv

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