Wednesday, 22 of November of 2017

Economics. Explained.  

Pending Home Sales

October 26, 2017

Pending home sales were unchanged in September at 106.0 after having declined 2.8% in August.  This series tends to be rather volatile on a  month-to-month basis, but the reality is that it has fallen in five of the past seven months.  So which is it?  A dropoff in demand?  Or a shortage of available homes for sale?  We believe it is the latter.

Lawrence Yun, NAR chief economist said “While most of the country, except for the South, did see minor gains in contract signings last month, activity is falling further behind last year’s pace because new listings aren’t keeping up with what’s being sold.”  Sales in the South fell sharply in both August and September.  It is not clear where the index would be in the absence of the hurricanes — higher, but still below the year ago level.   Most of those missed sales will show up in 2018.

Housing remains quite affordable for middle income buyers.  After peaking at 213.6 in January 2013 the housing affordability index has declined slowly and now stands at 150.0.  What that means is that potential buyers had 50.0% more income than was necessary to buy a median priced home (compared to 14% in 2007).   The  housing affordability index has declined slightly in response to the increase in the 30-year mortgage rate to 3.9%.  However, it has not fallen more sharply because consumer income continues to climb.

Keep in mind, too, that the the average home stays on the market for just 34 days which is essentially the shortest amount of time  since the NAR began collecting that statistic in 2011.

At the same time the builders report  more traffic through their model homes than they have seen in a decade.

Thus, it is quite evident that the dropoff in pending home sales is a function of constrained supply and lousy weather rather than potential home buyers backing away from the market.

This  series on pending home sales is collected by the National Association of Realtors and represents contracts signed, but not yet closed, on existing home sales.  Thus, it is both a leading indicator of existing home sales and housing market activity in general.   Not all these contracts go to completion.  The buyer may not qualify for a mortgage, the house may not appraise at a sufficiently high value, or the house may fail the buyer’s inspection.  But the series is clearly indicative of changes in housing market activity.

Stephen Slifer


Charleston, SC

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