MARKET TRENDS: Pending Home Sales Decline by 0.9% in November

Despite warmer than normal temperatures across much of the nation, contracts to purchase previously owned homes fell in November, signifying that growth in the U.S. housing market could be cooling down.

According to the National Association of Realtors (NAR), pending home sales, a measure of signed contracts (not closings), decreased by 0.9% to a reading of 106.9 in November – compared to an increase of 0.2% in October. An index of 100 indicates the average level of contract activity during 2001; this is considered by NAR to be a “normal” or balanced market for the current U.S. population. Economists had expected sales to increase by 0.5%. Although pending home sales were 2.7% higher than November of 2014, they have shown a decline in three of the past four months.

Pending home contracts, which may become sales after a month or two, offer a forecast of the housing market because they measure purchases at the time a contract is signed rather than at closing. The fall in recent months could point to slower growth in home purchases in 2016, when interest rates are expected to rise. Mortgage rates have only inched higher since the Federal Reserve raised its benchmark rate by a quarter point on Dec. 16, and Fed policymakers are expected to continue hiking next year.

“Home prices rising too sharply in several markets, mixed signs of an economy losing momentum and waning supply levels have acted as headwinds in recent months despite low mortgage rates and solid job gains,” said Lawrence Yun, chief economist at the NAR. “While feedback from Realtors continues to suggest healthy levels of buyer interest, available listings that are move-in ready and in affordable price ranges remain hard to come by for many would-be buyers.”

On a region-wide basis, pending home sales in the Northeast decreased 3.0%, but they were up 4.3% compared to a year ago. In the Midwest, they rose 1.0% for the month and 4.1% annually. In the South, sales increased 1.3% for the month and are 0.5% higher than last November. In the West sales declined 5.5% and are 4.5% above a year ago.

Low inventory in the housing market has caused home prices to increase at a faster pace than income growth. According to a December report from Realtor.com, one of the nation’s largest real estate listing companies, homes are selling more quickly today than they were at the same time last year. On the company’s list of “hottest housing markets,” California occupies eight of the top 10 spots. The other two spots are held by Dallas and Denver.

“While California closed out our latest ranking still firmly in control of the hottest markets, the Midwest and Florida are both seeing substantial improvement,” said Jonathan Smoke, chief economist at Realtor.com. “Pent-up demand and robust economic growth combined with limited supply will keep the California housing market tight in 2016, but more markets will challenge them as demand improves elsewhere.”

With sales of existing homes also sliding 10.5% to a 19-month low in November, Thomas Costberg, a senior U.S. economist at Standard Chartered Bank in New York feels “There is some softness creeping into the housing market.” However, according to some, a spark of hope remains, given that conditions for sustained gains in home demand still persist. Hiring is strong and mortgage costs are at record low levels. Sam Bullard, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, is sure that “the housing market is still positioned for gradual improvement in 2016,” since fundamentally, the situation is still favorable.