Pending Sales; Foiled Again!

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Analysts had expected to hear that
pending home sales had a good run in November, perhaps even breaking its 10-month
streak of year-over-year declines; Econoday
went so far as to predict “A big bounce back is the forecast for November pending
home sales.”  Instead, the National
Association of Realtors® (NAR) announced that its Pending Home Sales Index (PHSI)
was down 0.7 percent compared to October.

The Index, based on signed contracts
to purchase existing homes, slipped from 102.1 in October to 101.4.  This was a 7.7 percent decline from the
November 2017 level, extending the losing streak to 11 months.

The November results were below even
the most negative predictions from analysts polled by Econoday. Those ranged from an 0.6 percent to loss to a 2.2 percent
gain.  The consensus was for an increase
of 1.5 percent.

In his
remarks, Lawrence Yun, NAR chief economist, sought to put the pending sales
data in the most positive light. “The latest decline in contract signings
implies more short-term pullback in the housing sector
and does not yet capture
the impact of recent favorable conditions of mortgage rates,” he said.  He added that while pending contracts have reached
their lowest mark since 2014, there is no reason to be overly concerned, and he
predicts solid growth potential for the long-term.

All four major
regions sustained a drop
when compared to one year ago, with the West taking
the brunt of the decrease.  However, he
noted that the West had posted a monthly increase of 2.8 percent while still
experiencing the biggest annual decline among the regions because of
unaffordable conditions.

Yun suggests
that affordability challenges in the West are part of the blame for the drop in
sales. Home prices in the West region have risen too much, too fast, according
to Yun. “Land cost is expensive, and zoning regulations are too stringent.
Therefore, local officials should consider ways to boost local supply; if not,
they risk seeing population migrating to neighboring states and away from the
West Coast.”

Yun said he
expects the current government shutdown to harm the housing market. “Unlike
past government shutdowns, with this present closure, flood insurance is not
available
. That means that roughly 40,000 homes per month may go unsold because
purchasing a home requires flood insurance in those affected areas,” Yun said.
“The longer the shutdown means fewer homes sold and slower economic growth.”

One bright
spot is the easing of inventory restraints due to an increase in active
listings in a number of areas.  Yun cited
large year-over-year increases in Denver, Seattle-Tacoma, the San Francisco Bay
area, San Diego, and Providence, Rhode Island.

The economist remains
optimistic about sales in the long-term. “Home sales in 2018 look to close out
the year with 5.3 million home sales, which would be similar to that
experienced in the year 2000,” he said.  ‘But
given the 17 million more jobs now compared to the turn of the century, the
home sales are clearly underperforming today.
That also means there is steady
longer-term growth potential.”

Two regions
did see monthly improvements in their indices in November. In addition to the
2.8 percent increase in the West noted by Yun, the Northeast rose 2.7 percent
to 95.1, leaving it 3.5 percent lower than a year ago.  The increase in the West brought its index to
87.2 which is still 12.2 percent below the November 2017 level.

Pending sales
in the Midwest fell 2.3 percent to 98.1, down 7.0 percent year-over-year and
the South’s index read 115.7 representing declines of 2.7 percent and 7.4
percent from the two earlier periods.

The PHSI 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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