Housing Sentiment Lukewarm, Leads to Dismal Sales - Again
The leading indicator for existing home sales continued to struggle in August and for the fourth time in the last five months purchase contract executions fell back from those in the previous month. The National Association of Realtors® (NAR) said its Pending Home Sales Index (PHSI), which is based on contract signings, dropped 1.8 percent to 104.2 from the July reading of 106.2.
NAR said it was also the eighth straight month that its index was lower year-over-year. The August reading was down 2.3 percent from the level in August 2017.
Expectations were not high for the August report. The consensus of analysts polled by Econoday was for the PHSI to be unchanged from July. The actual results were below even the lowest of analysts estimates which ranged from an 0.5 percent decline to a 2.0 percent increase.
Lawrence Yun, NAR chief economist, says that low inventory continues to contribute to the housing market slowdown. "Pending home sales continued a slow drip downward, with the fourth month-over-month decline in the past five months," he said. "The greatest decline occurred in the West region where prices have shot up significantly, which clearly indicates that affordability is hindering buyers and those affordability issues come from lack of inventory, particularly in moderate price points."
Yun cited the third quarter Housing Opportunities and Market Experience (HOME) survey in which a record high number of Americans believe now is a good time to sell. "Just a couple of years ago about 55 percent of consumers indicated it was a good time to sell; that figure has climbed close to 77 percent today.
"With prices having risen so quickly, many consumers were deciding to wait to list their homes hoping to see additional price and equity gains. However, with indications that buyers are beginning to pull out, price gains are going to decelerate, and potential sellers are considering that now is a good time to list and bring more properties to the market." This may be happening he said, pointing to year-over-year increases in active listing numbers in some markets like Seattle, San Diego, and Nashville.
Interest rates have been rising and Yun said, while this is always deterrent to potential buyers, it should not lead to a significant decline. "We have two opposing factors affecting the market: the negative impact of rising mortgage rates and the positive impact of continued job creation. This should lead to future homes sales staying fairly neutral. As long as there is job growth, rising mortgage rates will hinder some buyers; but job creation means second or third incomes being added to households which gives consumers the financial confidence to go out and make a home purchase."
There will probably be a decline in existing-home sales this year, he said, forecasting a decline of about 1.6 percent from last year to 5.46 million units. He expects the national median existing-home price will increase 4.8 percent by year-end. Sales of existing homes will rise 2 percent in 2019 while prices should increase by about 3.5 percent.
While Yun said results in the Western region was a drag on the national index, the PHSI was down in every region and is lagging last year everywhere but in the South. The index in the Northeast dropped 1.3 percent to 92.7 in August and is now 1.6 percent below a year ago. In the Midwest, the index was down 0.5 percent from July and 1.1 percent compared to August 2017.
The PHSI in the South dipped 0.7 percent to 121.3, while remaining 1.3 percent higher than last year. The index in the West decreased 5.9 percent in August to 89.1 and plummeted 11.3 percent below a year ago.
The PHSI is based on a large national sample, typically representing about 20 percent of transactions for existing-home sales. In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity parallels the level of closed existing-home sales in the following two months.
An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined. By coincidence, the volume of existing-home sales in 2001 fell within the range of 5.0 to 5.5 million, which is considered normal for the current U.S. population.