without more new home construction the current housing recovery could stall
After bouncing back in July, pending home sales cooled in August for the third time in four months and to their lowest level since January, according to the National Association of Realtors (NAR).
The Pending Home Sales Index (PHSI), a forward-looking indicator based on contract signings, declined 2.4 percent to 108.5 in August from a downwardly revised 111.2 in July and is now slightly lower (0.2 percent) than August 2015 (108.7). With last month's decline, the index is now at its second lowest reading this year after January (105.4).
The Pending Home Sales Index is a leading indicator for the housing sector, based on pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not closed, though the sale usually is finalized within one or two months of signing.
The index 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.
Lawrence Yun, NAR chief economist, says suffering supply levels have taken the wind out of the momentum the housing market experienced earlier this year. "Contract activity slackened throughout the country in August except for in the Northeast, where higher inventory totals are giving home shoppers greater options and better success signing a contract," he said. "In most other areas, an increased number of prospective buyers appear to be either wavering at the steeper home prices pushed up by inventory shortages or disheartened by the competition for the miniscule number of affordable listings."
According to Yun, evidence is piling up that without more new home construction the current housing recovery could stall. Housing inventory has declined year-over-year for 15 straight months; properties in August typically sold 11 days quicker than in August 2015 and after increasing 5.1 percent last month, existing-home prices have risen year-over-year for 54 consecutive months.
"There will be an expected seasonal decline in new listings in coming months, which could accelerate price appreciation and make finding an affordable home even more of a struggle for would-be buyers," added Yun.
Earlier this month, the NAR released a new study that revealed single-family home construction is not keeping pace with job creation and is lacking overall in 80 percent of measured metro areas. When combined with the scant supply levels for existing homes, these tight inventory conditions continue to hamper affordability in many of the largest cities in the country – especially those in the West.
Following last month's decline, Yun expects existing-home sales in 2016 to be around 5.36 million, a 2.1 percent increase from 2015 and the highest annual pace since 2006 (6.48 million). The national median existing-home price growth is forecast this year to rise around 4 percent.
The PHSI in the Northeast rose 1.3 percent to 98.1 in August, and is now 5.9 percent above a year ago. In the Midwest the index decreased 0.9 percent to 104.7 in August, and is now 1.7 percent lower than August 2015.
Pending home sales in the South declined 3.2 percent to an index of 119.8 in August and are now 1.5 percent lower than last August. The index in the West fell 5.3 percent in August to 102.8, and is now 0.6 percent lower than a year ago.
The National Association of Realtors, "The Voice for Real Estate," is America's largest trade association, representing 1.1 million members involved in all aspects of the residential and commercial real estate industries.
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.