MARKET TRENDS: Pending Home Sales Increase By Just 0.2% in October

In a recent report, the National Association of Realtors (NAR) announced that pending home sales index edged up to 107.7 in October, eking out a gain of just 0.2%. While this increase marked the end of two straight months of declines, it fell decidedly short of economists’ expectations for a 1.0% rebound. Pending sales were 3.9% higher compared to October 2014, and have seen annual advancements for the past 14 months.

The pending home sales index tracks real estate transactions in which a contract has been signed but the transaction has not yet closed. These contracts are a forward-looking indicator of closed sales in November and December.

Closed sales of existing homes fell 3.4% in October from September, a wider-than-expected drop. Home prices in September were 5.5% higher than in September 2014, according to Black Knight Financial Services.

According to the National Association of Realtors, buyers are struggling with lean inventory, and this is what’s driving prices higher. There were 4.5% fewer homes listed for sale last October than in October 2014. The NAR has forecast just 3% more sales in 2016, compared with this year, due to falling inventory and rising prices.

Lawrence Yun, NAR’s chief economist said, “Unless sizeable supply gains occur for new and existing homes, prices and rents will continue to exceed wages into next year and hamstring a large pool of potential buyers trying to buy a home.”

Over the past several weeks, mortgage interest rates have risen steadily and could move even higher going into 2016, provided that the Federal Reserve raises rates in December.

Contract signings in October showed the maximum increase in the Northeast, which until now hasn’t experienced much of the drastic price appreciation and supply constraints currently taking place in other parts of the country. Meanwhile, in the most competitive metro areas, such as those in the South and West, affordability concerns remain significant, as low inventory continues to drive up prices. Pending home sales rose 4.5% month-to-month in the Northeast and by 1.7% in the West. Sales fell 1% in the Midwest and by 1.7% in the South.

Homebuilders Confidence Dips in November

The report of weak U.S. pending home sales data comes on the heels of a dip in homebuilders’ confidence in November, suggesting a moderation in overall housing activity. The National Association of Home Builders housing-market index fell three points to 62 in November, from a revised October reading of 65. The reading was a decline from an unusually high October, and reflected scarcity of land and labor, which continue to stymie growth. Of the index’s three components, sales expectations over the next six months decreased the most, down five points to 70. Current sales conditions dropped three points to 67, while the component measuring buyer traffic increased one point to 48. Anything above 50 is considered positive sentiment.

Overall, builder confidence tracked significantly higher than actual home construction. Usually, the two move in sync; however, this time housing starts were well below historical demand levels. Although the number more than doubled since the depths of the recession, it still stood roughly at half of its 2006 peak. This was primarily because the supply of existing homes for sale nationwide remained very low. Homeowners were more inclined to remodel than they were to move up.