Sunday, 18 of February of 2018

Economics. Explained.  

Pending Home Sales

January 31, 2018

Pending home sales rose 0.5% in December after having climbed 0.3% in November.    But this series has been relatively flat for the past year.  Over the course of the past year this index has risen just 0.5% in the past 12 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  “Another month of modest increases in contract activity is evidence that the housing market has a small trace of momentum at the start of 2018.  Jobs are plentiful, wages are finally climbing and the prospect of higher mortgage rates are perhaps encouraging more aspiring buyers to begin their search now.  Sadly, these positive indicators may not lead to a stronger sales pace. Buyers throughout the country continue to be hamstrung by record low supply levels that are pushing up prices — especially at the lower end of the market.”

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 160.0.  What that means is that potential buyers had 60.0% 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 4.0% and the modest increase in home prices.  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 40 days which compares to about 100 days when the NAR began collecting this statistic in 2011.  The NAR reporats that one-half of homes that come on the market sell within a month.

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  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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