Pending Home Sales Rise; NAR Sees Tight Inventory Leading to Price Increases

Pending home sales in May bounced back to match March numbers which were the highest seen in two years. The improvement was broad-based, affecting every region in the country according to the National Association of Realtors® (NAR). 

NAR's Pending Home Sales Index (PHSI) rose 5.9 percent in May from 95.5 in April to 101.1, equaling the index level last March.  This was an increase of 13.3 percent from May 2001 when the index was 89.2.  The last time the PHSI was higher than the March and May number was in April 2010 when buyers were rushing to beat the deadline for the home buyer tax credit.

The PHSI is a forward indicator reflecting signed contracts for home purchases.  The index does not include closing transactions which are generally expected to occur within 60 to 90 days.

Lawrence Yun, NAR chief economist, said longer term comparisons are more relevant.  "The housing market is clearly superior this year compared with the past four years.  The latest increase in home contract signings marks 13 consecutive months of year-over-year gains," he said.  "Actual closings for existing-home sales have been notably higher since the beginning of the year and we're on track to see a 9 to 10 percent improvement in total sales for 2012."

The national median existing-home price is expected to rise 3.0 percent this year and another 5.7 percent in 2013.

On a regional basis, May pending sales in the Northeast increased 4.8 percent to 82.9, 19.8 percent above May 2011.  The pending sales number in the Midwest was 98.9 up 6.3 percent from April and 22.1 percent from a year ago.  The index for the South increased 1.1 percent month over month and 11.9 percent year over year to an index of 106.9.  In the West the index jumped 14.5 percent in May to 108.7 and is 4.8 percent stronger than a year ago.

Yun said that low inventory could negatively impact some contract activity.  "If credit conditions returned to normal and if we had more inventory, especially in the lower price ranges, more people would become successful buyers.  In an environment of historically favorable housing affordability conditions, it's frustrating to see some consumers thwarted in the process," he said.

The low inventory in some cases is because of the numbers of homeowners who are unwilling to list their homes for sale because they are underwater on their mortgages.  Selling underwater homes requires that sellers either bring cash to the table or undergo a lengthy and often frustrating short sale process.  NAR estimates 85 percent of homeowners have positive equity, with 15 percent in an underwater situation.

"Low inventory can be cured by increasing new home construction," Yun said.  He projects housing starts to rise by 26 percent this year and another 50 percent in 2013.  "If housing starts do not rise in a meaningful way over the next two years due to the difficulty in getting construction loans, and barring an unexpected shift in the economy, the steady shedding of inventory could lead to shortages where home prices could get bid up close to 10 percent in 2013," Yun said.