Pending Home Sales Plunge across the US. Midwest Sees Worst Sales on Record, Northeast 2nd Worst

Pending home sales plunged 9.3% month‑over‑month (seasonally adjusted) in December to the weakest December on record, extending a four‑year collapse in transaction activity and leaving pending contracts far below pre‑COVID levels (down 21.5% vs. Dec 2010). All four U.S. Census regions posted steep declines—Midwest -14.9% m/m (record low), West -13.3% m/m (worst December), Northeast -11.0% m/m, South -4.0% m/m (only region with modest year‑over‑year strength)—with elevated cancellation rates in 2025. The piece attributes the ongoing weakness to the legacy of ultra‑low 2020–22 mortgage rates that inflated prices and “locked in” homeowners, and notes implications for mortgage markets as the unwinding of below‑4% loans proceeds slowly, keeping pressure on housing demand, MBS performance and related credit exposure.

Analysis

Market structure: The collapse in pendings compresses mid-to-entry-level pricing power while leaving luxury and supply-constrained coastal markets relatively insulated; expect mid-market median price pressure of 5–15% over 12–24 months as transactions re-price. Sellers with sub-4% locked mortgages remain “holdouts,” keeping effective supply tight but increasing months-supply measured against the lower sales cadence; MBS spreads should widen and mortgage-originator revenues fall as origination volume drops.

Risk assessment: Tail risks include a cascading ARM/servicer stress event, regional-insurer withdrawal in flood/fire zones, or a policy shock that tightens credit (each <15% probability but material). Timeline: immediate (days/weeks) — wider MBS spreads, regional-bank volatility; short-term (3–6 months) — homebuilder and broker earnings misses; long-term (12–36 months) — structural mobility and affordability-driven reallocation of housing stock. Hidden dependencies: local insurance availability, state-level tax/condemnation shifts, and Fed signaling that could reprice the long-end rapidly.

Trade implications: Favored moves are defensive and relative-value: short homebuilder exposure and mortgage-origination earnings while selectively buying agency MBS when spreads exceed thresholds. Expect elevated volatility for 3–6 months around Fed windows, NAR monthly prints, and MBA weekly mortgage apps — use these as execution triggers. Cross-asset: long-duration Treasuries or hedges if equity risk-off accelerates; commodity demand (lumber, copper) likely to soften into H1–H2 2026.

Contrarian angles: The market overlooks bifurcation — high-end and constrained coastal stock can stay firm even as 30–40% of markets correct; that implies mispricings across single-family rental assets and construction suppliers. Historical parallel is post-2006 regional dispersion (not a nationwide leverage blow-up), so targeted shorts (mid-market builders) and selective longs (quality coastal REITs, serviced MBS) outperform blanket bets. Monitor 30yr UMBS–10yr spread and local insurance filings as early reversal signals.

Key Decisions for Investors

• Establish a 2–4% short position in homebuilder exposure: buy 3–6 month ITB/ XHB put spreads sized to risk (e.g., buy ITB 3‑month 18% OTM puts, sell 3‑month 12% OTM puts) to profit from an anticipated 10–25% move lower in the sector over 3–9 months.
• Trim 20–40% exposure to regional banks and mortgage-originators (small- to mid-cap lenders) within the next 30 days; redeploy proceeds into high-quality liquid duration (buy TLT or 7–10yr Treasury exposure) if 10yr yield drops below 3.80% or into agency MBS (MBB) when 30yr UMBS spread to 10yr Treasuries > 180bp.
• Establish a 1–3% long position in agency MBS (MBB) as a tactical yield/credit play when spreads widen; enter if 30yr UMBS coupon – 10yr Treasury > 180bp and horizon is 6–24 months to capture carry and spread compression.
• Implement a pair trade: long XLP (consumer staples) 2% and short ITB 2% to rotate out of cyclical housing exposure into defensive consumption ahead of likely earnings shocks over next 2–6 quarters.
• Monitor weekly MBA mortgage applications, monthly NAR pending home sales, and 30yr UMBS–10yr spread as execution/cut loss triggers: reduce short homebuilder exposure by 50% if pending sales recover quarter-over-quarter by >8% sustained for two months or if 10yr yield falls >70bp within 30 days.