Inventories Recover as Pending Home Sales Cool
Pending home sales in October failed to build on their small September gains - only the second uptick in six months. The Pending Home Sales Index (PHSI) from the National Association of Realtors® (NAR) declined 2.6 percent to 102.1 in October from 104.8 the prior month. The index, a forward-looking indicator based on new purchase contracts for existing homes, was down even more significantly on a year-over-year basis, falling for the tenth straight month, this time by 6.7 percent.
Given the PHSI's recent track record, analysts weren't expecting much improvement. Those polled by Econoday had made predictions in the range of -0.5 percent to 1.0 percent, but the consensus was for the index to remain at the September level.
Lawrence Yun, NAR chief economist, said that ten straight months of annual decline certainly isn't favorable news for the housing sector. "The recent rise in mortgage rates have reduced the pool of eligible homebuyers," he said, likening the current performance to the last similar period of decline, the 2013 "Taper Tantrum." At that point interest rates jumped from 3.5 percent to 4.5 percent when the Federal Reserve announced a gradual end to its monetary intervention. Sales rebounded in September 2014 when, after 11 months, rates went down. "But this time, interest rates are not going down," Yun said. "In fact, they are probably going to increase even further."
While the short-term outlook is uncertain, Yun stressed that he is very optimistic about the long-term, noting that current sales are about the same level as in 2000. "However, mortgage rates are much lower today compared to earlier this century, when mortgage rates averaged 8 percent. Additionally, there are more jobs today than there were two decades ago," said Yun. "So, while the long-term prospects look solid, we just have to get through this short-term period of uncertainty."
Pending sales were up month-over-month in the Northeast but all four regions declined compared to a year ago, with the West seeing the most pronounced drop. Yun said that decline is not at all surprising. "The West region experienced the fastest run-up in home prices in a short time and therefore, has essentially priced out many consumers," he said.
Yun cautions the Federal Reserve to be less aggressive in raising rates, citing the collapse in oil prices and resulting lower gasoline prices. "The inflationary pressure is all but disappearing. Given that condition, there is less of a need to aggressively raise interest rates. Looking at the broader economy and keeping in mind that the housing sector is a great contributor to the economy, it would be wise for the Federal Reserve to slow the raising of rates to see how inflation develops."
As sales retreat inventories of available homes are increasing. Yun said there have been year-over-year increases in active listings in a number of former sales hot-spots such as Denver, and Seattle. San Diego and San Francisco saw the largest increases compared to a year ago.
Yun expects existing-home sales this year to decrease 3.1 percent to 5.34 million, and the national median existing-home price to increase 4.7 percent. Looking ahead to next year, existing sales are forecast to decline 0.4 percent and home prices to drop roughly 2.5 percent.
The PHSI in the Northeast rose 0.7 percent to 92.9 in October and is now 2.9 percent below a year ago while the Midwest's index fell 1.8 percent to 100.4 and is 4.9 percent lower than in October 2017. Pending home sales in the South fell 1.1 percent to 118.9 which is 4.6 percent lower than the previous October. Pending sales were down 8.9 percent in the West to 84.8, 15.3 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.