Pending Sales; Foiled Again!

Analysts had expected to hear that pending home sales had a good run in November, perhaps even breaking its 10-month streak of year-over-year declines; Econoday went so far as to predict "A big bounce back is the forecast for November pending home sales."  Instead, the National Association of Realtors® (NAR) announced that its Pending Home Sales Index (PHSI) was down 0.7 percent compared to October.

The Index, based on signed contracts to purchase existing homes, slipped from 102.1 in October to 101.4.  This was a 7.7 percent decline from the November 2017 level, extending the losing streak to 11 months.

The November results were below even the most negative predictions from analysts polled by Econoday. Those ranged from an 0.6 percent to loss to a 2.2 percent gain.  The consensus was for an increase of 1.5 percent.

In his remarks, Lawrence Yun, NAR chief economist, sought to put the pending sales data in the most positive light. "The latest decline in contract signings implies more short-term pullback in the housing sector and does not yet capture the impact of recent favorable conditions of mortgage rates," he said.  He added that while pending contracts have reached their lowest mark since 2014, there is no reason to be overly concerned, and he predicts solid growth potential for the long-term.

All four major regions sustained a drop when compared to one year ago, with the West taking the brunt of the decrease.  However, he noted that the West had posted a monthly increase of 2.8 percent while still experiencing the biggest annual decline among the regions because of unaffordable conditions.

Yun suggests that affordability challenges in the West are part of the blame for the drop in sales. Home prices in the West region have risen too much, too fast, according to Yun. "Land cost is expensive, and zoning regulations are too stringent. Therefore, local officials should consider ways to boost local supply; if not, they risk seeing population migrating to neighboring states and away from the West Coast."

Yun said he expects the current government shutdown to harm the housing market. "Unlike past government shutdowns, with this present closure, flood insurance is not available. That means that roughly 40,000 homes per month may go unsold because purchasing a home requires flood insurance in those affected areas," Yun said. "The longer the shutdown means fewer homes sold and slower economic growth."

One bright spot is the easing of inventory restraints due to an increase in active listings in a number of areas.  Yun cited large year-over-year increases in Denver, Seattle-Tacoma, the San Francisco Bay area, San Diego, and Providence, Rhode Island.

The economist remains optimistic about sales in the long-term. "Home sales in 2018 look to close out the year with 5.3 million home sales, which would be similar to that experienced in the year 2000," he said.  'But given the 17 million more jobs now compared to the turn of the century, the home sales are clearly underperforming today. That also means there is steady longer-term growth potential."

Two regions did see monthly improvements in their indices in November. In addition to the 2.8 percent increase in the West noted by Yun, the Northeast rose 2.7 percent to 95.1, leaving it 3.5 percent lower than a year ago.  The increase in the West brought its index to 87.2 which is still 12.2 percent below the November 2017 level.

Pending sales in the Midwest fell 2.3 percent to 98.1, down 7.0 percent year-over-year and the South's index read 115.7 representing declines of 2.7 percent and 7.4 percent from the two earlier periods.

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.