Despite all the frenzied headlines about rapidly rising interest rates, there was a slight decline in mortgage rates in both December and January. According to a newly released data set from the National Association of Realtors, this gave a bump to pending home sales for the second month in a row.

The Pending Home Sales Index, which is a forward-looking indicator of home sales based on contracts signed, saw an 8% improvement in January. However, year-over-year, pending sales went down by 24%.

The last time we saw anything above an 8% increase every month in pending contracts was three months after lockdowns from the pandemic. Showings were at a complete standstill, and in June 2020, the pending home sales pace went up 17% compared to the month before.

Lawrence Yin, NAR Chief Economist, said buyers responded to more affordability stemming from declining mortgage rates in December and January.

The NAR is continuing to predict that the economy will keep adding jobs the rest of this year and into 2023, and they believe the 30-year fixed mortgage rate will steadily decline to reach a 6.1% average in 2023, with an average of 5.4% in 2023.

The Pending Home Sales Index is one of the primary indicators of activity in the housing market and measures housing contract activity. It’s based on the signed contracts in real estate for existing single-family properties, condos, and co-ops.

A home goes under contract around a month or two before it’s sold, so the Pending Home Sales Index leads the sales of existing homes by a month or sometimes two.

So what does all this mean if you’re a buyer or a seller?

The housing market is probably going to continue to see significant fluctuations.

Sellers are offering price concessions, but higher interest rates mean buyers might still stick to the sidelines for now.

Pending sales data from January shows that the housing market possibly reached its bottom at the end of 2022, but that doesn’t mean we can expect a V-shaped recovery, according to Bright MLS Chief Economist Lisa Sturtevant. She expects a bumpy road as the housing market tries to normalize.

Over the most recent few weeks, mortgage rates have returned to a rising trend, with the Federal Reserve indicating it will raise rates a minimum of two more times and potentially three before the end of the year.

February saw lower mortgage applications, with rates hitting the highest point since last November.

While leading indicators show upticks in activity, the weekly housing market activity most recently shows a decline in buyer interest.

For some would-be buyers, higher interest rates mean they’ll be sitting out indefinitely, while others will ultimately get back into the market either way.

NAR predicts that even with job gains and potential improvements in interest rates, existing home sales will decline 11% in 2023 and then go up 18% in 2024. The organization projects new home sales will decline 4% year-over-year for 2023 and go up 19% next year. NAR believes home prices will stay steady in most of the country, with minor shifts in the national median home price.

Finally, regionally, the Midwest index went up by 8%, and the South did as well. The West rose 10% in January, with a bump coming from lower home prices, while gains in the South were largely because the region saw strong job growth.