MARKET TRENDS: Pending Home Sales at Nine-Year High

After solid existing and new home sales, pending home sales in the U.S. rose for the fifth straight month in May, hitting the highest level in over nine years. A stronger labor market, an improving wage, and lower mortgage rates continue to boost the housing industry and economy as a whole.

The strong rise in existing and new home sales was primarily driven by higher demand from first time home buyers. The housing market recovery is back on track after a slump in the first quarter, due to bad weather conditions.

The Pending Home Sales Index, a measure of the change in homes under contract to be sold but still awaiting the closing transaction, has climbed 0.9% to 112.6, against a revised 111.6 in April, the National Association of Realtors said on Monday. The Index has increased for nine consecutive months and was at its highest level since April 2006.

The market expectation was for pending home sales to rise 1.2% in May after a 3.4% rise in April. The Index rose 10.4% in May, up from the year-ago period (101.9). All four major regions showed solid gains from the previous year.

In the Northeast and West, the Index jumped 6.3% and 2.2% to 93.9 and 104.5 respectively in May. The Index in the Northeast and West is now 10.6% and 13% above a year ago. The Pending Home Sales Index declined in the Midwest by 0.6% to 111.4 in May, but is still 7.8% above May 2014. Pending home sales in the South decreased 0.8% to an index of 127.8 in May but is still 10.6% above last year.

Housing prices have risen by an unsustainable pace as sales have increased, yet housing supply levels have remained at the same level from the year ago period. This raises concerns on housing affordability.

Meanwhile, Texas factory activity declined again in June. The Dallas Fed Manufacturing Index came in at a -7.0, better than the market estimate of -16.0 in June. In May, the Index was at -20.8, the lowest since June 2009. The monthly survey is conducted by the Dallas Fed to obtain a timely assessment of the state factory activity. The composite index has been on the decline through 2015.

Production contracted, however, at a slower pace. Manufacturing activities were pressured by lower oil prices that restricted business investments and a stronger dollar that hurt the export business. The Production Index, a key measure of state manufacturing conditions, improved but remained in the negative territory at -6.5, indicating a fourth consecutive month of contracting output. New orders came in at a slower pace, as the New Order Index moved up to -10.3, while the growth rate of orders Index edged down to -16.5.

Despite the rise in housing costs and the decline in manufacturing, an improving U.S. economy raises hopes. Expectations regarding future business conditions improved in June. The index of Future General Business Activity edged up to 8.1 and the index of Future Company Outlook came in at 13.4. Indexes of Future Manufacturing Activity moved down slightly but remained in solid positive territory.

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