Pending sales post annual decrease despite strong monthly gains

February's rate of pending sales in the United States was up from a sharp drop in January but still down from the previous year, according to the National Association of Realtors.

The index for the month was 107.5, up 3.1 percent from January's downwardly revised figure of 104.3. In that month, the pending sales rate plummeted 4.7 percent from the previous month and 9.5 percent from the previous year. Despite the improvement, February's index was 4.1 percent lower than the rate for February 2017.

The organization posts monthly updates to its Pending Home Sales Index, which measures transactions where a contract has been signed but a sale has not yet closed. This action typically takes place within two months, making the index a good measure of upcoming activity in existing home sales. An index of 100 is equal to existing home sales activity in 2001, which had a transaction rate of 5 million to 5.5 million; this range is considered normal for the current U.S. population.

Lawrence Yun, chief economist for the National Association of Realtors, said one reason for the year-over-year decline was the strong measure from February 2017. At that time, the Pending Home Sales Index stood at 112.1 – its second highest point in over a decade. Yun said buyers also continue to be constrained by a limited inventory and higher home prices in many markets.

"The expanding economy and healthy job market are generating sizeable homebuyer demand, but the miniscule number of listings on the market and its adverse effect on affordability are squeezing buyers and suppressing overall activity," said Yun.

Yun said rising mortgage rates could also have an increasingly prominent effect on sales activity. He said higher rates could not only add to the affordability concerns of buyers, but also discourage homeowners from listing their home due to the concern that they would pay a higher rate on their next home purchase.

"Homeowners are already staying in their homes at an all-time high before selling, and any situation where they remain put even longer only exacerbates the nation's inventory crunch," said Yun. "Even if new home construction starts picking up at a faster pace this year, as expected, existing sales will fail to break out if these record low supply levels do not recover enough to meet demand."

Yun is currently predicting that there will be approximately 5.51 million existing homes sold  in the U.S. in 2018, on par with the 2017 sales rate; he also expects the median existing home price to grow by 4.2 percent. Last year, existing sales were up 1.1 percent while median home prices grew by 5.8 percent.

Pending sales were up from the previous month but down from the previous year in each of the four geographical regions identified by the National Association of Realtors. The index for the Midwest had the largest year-over-year drop, falling 9.5 percent from February 2017 to 98.9 – a 0.7 percent increase from January.

In the Northeast, the Pending Home Sales Index stood at 96 – a jump of 10.3 percent from January, but a decline of 5.1 percent from February 2017. This followed a prominent decrease in January, when the region's index experienced a drop of 9 percent from the previous month and 12.1 percent from the previous year.

"Expect ongoing volatility in the Northeast region at least through March," said Yun. Although pending sales there bounced back in February following January's cold weather-related decline, the multiple winter storms over these last few weeks likely put a chill on contract signings once again this month."

The index for the South was up 3 percent from January to 125.7, but this was a 1.5 percent drop from the previous year. In the West, the index fell 2.2 percent from February 2017 to 96.9, but inched forward 0.4 percent from the previous month.


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