October Pending Home Sales Continue Their Decline

Pending home sales, which ended a four-month streak of gains in September with a 2.2 percent decline, slipped further in October. The National Association of Realtors® (NAR) said its Pending Home Sales Index (PHSI), a measure based on contracts signed during the month to purchase existing single-family homes, townhomes, condos, and cooperative apartments, was down 1.1 percent compared to the previous month. The index, now at a 128.9 level, remains 20.2 percent higher than in October 2019.

Analysts had been expecting a rebound in the forward-looking indicator. Those polled by Econoday had forecast over a range of a 1.0 percent increase to 3.9 percent with a consensus of 2.0 percent. Trading Economics had predicted a 1.0 percent gain.

"Pending home transactions saw a small drop off from the prior month but still easily outperformed last year's numbers for October," said Lawrence Yun, NAR's chief economist. "The housing market is still hot, but we may be starting to see rising home prices hurting affordability."

Speaking to the historically low levels of both available homes and mortgage interest rates, Yun said "The combination of these factors - scarce housing and low rates - plus very strong demand has pushed home prices to levels that are making it difficult to save for a down payment, particularly among first-time buyers, who don't have the luxury of using housing equity from a sale to use as a down payment," said Yun. "Work-from-home flexibility has also increased the demand for both primary and secondary homes."

Pending home sales are generally expected to be reflected in existing home sales over the next two months. However, October existing home sales were extraordinarily strong despite the dip in September contract signings. Those sales rose 4.3 percent month-over-month to a seasonally adjusted annual rate of 6.85 million and are now up 26.6 percent on an annual basis. The November existing home sales data will be released on December 30.

The South was the only major region where pending home sales increased from September and that gain was fractional. All regions are still posting double digit year-over-year increases.

The Northeast PHSI slid 5.9 percent to 112.3 in October but was up 18.5 percent from a year ago. In the Midwest, the index fell 0.7 percent to 119.6, a 19.6 percent annual gain.

The PHSI in the South was 151.1, a monthly gain of 0.1 percent and an annual increase of 21.0 percent. The West's index was unchanged at 116.8, but that was up 20.8 percent from October 2019

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.