Pending Home Sales Set Stage for Solid Summer Sales

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Pending home sales got back on track in May, increasing by 1.1 percent after a 1.5 percent setback in April.  The National Association of Realtors® (NAR) said its Pending Home Sales Index (PHSI), a measure of newly signed contracts for home purchase, rose from 104.3 in April to 105.4 last month. 

The May increase, the third in four months, was still not enough to pull pending sales above the 2018 level of activity. The PHSI was down 0.7 percent compared to the previous May, marking the 17th straight month of annual decreases.  Three of the four major regions saw growth in contract activity, with the West experiencing a slight sales decline.

Pending sales were expected to increase in May and the results were at the top of the predictions from analysts polled by Econoday.  Their forecasts had ranged from -0.1 to 1.1 percent with a consensus of an 0.6 percent gain.

Lawrence Yun, NAR chief economist, said lower-than-usual mortgage rates have led to the increase in pending sales for May. “Rates of 4% and, in some cases even lower, create extremely attractive conditions for consumers. Buyers, for good reason, are anxious to purchase and lock in at these rates.”

Yun said consumer confidence about home buying has risen, and he expects more activity in the coming months. “The Federal Reserve may cut interest rates one more time this year, but there is no guarantee mortgage rates will fall from these already historically low points,” he said. “Job creation and a rise in inventory will nonetheless drive more buyers to enter the market.”

Yun said that while contract signings and mortgage applications have increased, he repeated his call for more inventory, especially newly constructed homes. “Home builders have not ramped up construction to the extent that is needed,” he said. “Homes are selling swiftly, and more construction will help keep home prices manageable and thereby allow more middle-class families to attain ownership opportunities.”

The PHSI in the Northeast rose 3.5 percent to 92.0 in May and is down 0.5 percent on an annual basis. The Midwest saw a gain of 3.6 percent to a reading of 100.3, remaining 1.2 percent behind the year earlier results.

Pending home sales in the South inched up 0.1 percent to 124.1 and rose 0.7 percent on an annual basis. Contract signings in the West dropped 1.8 percent to 91.8 a 3.1 percent year over year decline.

The PHSI is a leading indicator of existing home sales and is based on a large national sample, typically representing about 20 percent of transactions for existing-home sales. In developing the model for the Index, it was demonstrated that the level of monthly sales-contract activity parallels the level of closed existing-home sales in the following two months.

An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined. By coincidence, the volume of existing-home sales in 2001 fell within the range of 5.0 to 5.5 million, which is considered normal for the current U.S. population.

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