Pending Home Sales Shed a Bit of January's Momentum

Pending home sales fell again in February. The National Association of Realtors® said its Pending Home Sales Index (PHSI) declined by 1.0 percent compared to January to a level of 101.9.  The index is now 4.9 percent lower than a year earlier, marking the 14th straight month of annual decreases.  The South and the West posted slight gains while the other two regions lost ground.

Analysts were not particularly bullish about the index's February prospects.  Those polled by Econoday had a wide range of expectations, from -3.0 percent to 3.2 percent. The consensus was for a slight 0.8 percent increase.

Lawrence Yun, NAR chief economist, said the month's loss is coming off a solid gain in the prior month. "In January, pending contracts were up close to 5 percent, so this month's 1 percent drop is not a significant concern," he said. "As a whole, these numbers indicate that a cyclical low in sales is in the past but activity is not matching the frenzied pace of last spring."

Yun said despite the growth in the West, the region's current sales are well below the sales activity from 2018. "There is a lack of inventory in the West and prices have risen too fast.  Job creation in the West is solid, but there is still a desperate need for more home construction."

Yun added that he does not anticipate any interest rate increases from the Federal Reserve in 2019. "If there is a change at all, I would say the Fed will lower interest rates in 2019 or 2020. That would stimulate the economy and the housing market," he said. "But the expectation is no change at all in the current monetary policy, which will help mortgage rates stay at attractive levels."

Yun expects existing-home sales this year to decrease 0.7 percent to 5.30 million, and the national median existing-home price to increase around 2.7 percent. Looking ahead to 2020, existing sales are forecast to increase 3 percent and home prices also around 3 percent.

On a regional basis the Northeast saw its PHSI down by 0.8 percent to 92.1 in February.  It is now 2.6 percent lower than a year ago.  In the Midwest there was a drop of 7.2 percent to 93.2 for the month.  The index is 6.1 percent lower than February 2018. 

Pending home sales in the South inched up 1.7 percent to 121.8, which is 2.9 percent lower than this time last year. The index in the West increased 0.5 percent in February to 87.5 and fell 9.6 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.