Pending Home Sales: Three Steps Forward, One Back

After steadily increasing for three straight months, pending home sales let up in May across all four major regions, and declined year-over-year for the first time in almost two years, according to the National Association of Realtors (NAR).

Based on contract signings, the NAR’s Pending Home Sales Index dropped to 110.8 in May from a 115 in April and was just shy of May 2015’s index of 111. It was the first time the index decreased year-over-year since August of 2014.

The largest dropoff occurred in the Northeast, which slid 5.3 percent to 93 in May and was unchanged from a year ago. The Midwest slipped 4.2 percent to 108 in May and was 1.8 percent below last May. The West decreased 3.4 percent in May to 102.6, remaining essentially flat compared to a year ago.

The South was the only market to finish higher than last May. The index there declined 3.1 percent to 126.6 in May, remaining by far the most robust market on the index and 0.6 percent higher than May of 2015.

NAR chief economist Lawrence Yun said the strong demand that has been frustrating buyers and the spring’s swift sales “took a dent out of what was available for sale in May and ultimately dragged down contract activity.”  he said.

“There are simply not enough homes coming onto the market to catch up with demand and to keep prices more in line with inflation and wage growth.”

Lawrence Yun, Chief Economist, NAR

Inventory shortages remain the bugaboo in many housing markets, triggered by still-low mortgage. The result of making houses easier to buy is that competition for them has gotten fierce and home prices are rising accordingly, Yun said.

“Total housing inventory at the end of each month has remarkably decreased year-over-year now for an entire year,” he said. “There are simply not enough homes coming onto the market to catch up with demand and to keep prices more in line with inflation and wage growth.”

Yun was not quite dour, but also not quite bullish on the second half of 2016 either, saying that the U.K.’s decision to leave the European Union last week will likely create a mixed bag for the U.S. housing market.

“In the short term, volatility in the financial markets could very likely lead to even lower mortgage rates and increased demand from foreign buyers looking for a safer place to invest their cash,” Yun said. “On the other hand, any prolonged market angst and further economic uncertainty overseas could negatively impact our economy and end up tempering the overall appetite for homebuying.”