By Shayla Mars  Thu Jan 23, 2014

Pending Home Sales Up, But for How Long?

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Each month, the National Association of Realtors (NAR) publishes a pending home sales index (PHSI). When a contract for a home is signed, but the sale has not yet closed, it is called a pending home sale. According to the NAR’s November 2013 report, national pending home sales are up by 0.2 percent since October 2013. The index plays a crucial role in keeping a finger on the pulse of housing demand in the economy. With such dramatic shifts happening in the American housing market, the index will be a great indicator for future home sales.

Simple Economics

Simplifying the economics that tie into the housing market is hard, but understanding certain aspects of the market is not.  The NAR describes the pending home sales index as an index “based on signed real estate contracts for existing single-family homes, condos and co-ops.” Investopedia states, “The pending home sales index is a leading indicator of future existing home sales, as it typically takes four to six weeks to close a sale after a contract has been signed.” In short, it measures housing contract activity.

When the index is up, contract activity is high, which is a sign that the economy is doing well overall. In 2013 there was a steady climb in the PHSI; it peaked in May and trended down during the winter months. It’s hard to say how 2013 compares to 2012 since December 2013 data hasn’t been published yet. Even without that particular data, the national PHSI for 2012 was at 100.5, while it was at 89.9 in 2011 — denoting a positive trend.

What increases the PHSI

Like many aspects of the housing market, pending home sales aren’t consistent each month. For example, home sales are lower in the winter than in the summer. A difference of a couple of percentage points doesn’t matter so much. The real concern is when the housing index is constantly low each month or lower overall than the year before. While the difference in index between 2010 and 2011 is minute, there was a significant jump of 10 points in 2012. 10 points may not seem like a lot, but it demonstrates a more active economy than previous years.

An increase in the housing index means demand is high and people feel confident when applying for mortgage loans. Confident buyers are just one reason for an increase. Low mortgage rates, inexpensive foreclosure prices and all around economic momentum created the sharp increase that defined 2012 sales.

What decreases the PHSI

The PHSI is up now, but the sharp increase in demand throughout the last two years has created limited supply of inventory for 2014. The increase in mortgage rates is a reflection of more demand than supply. When supply is low, it is easy for housing prices to rise. Bidding wars, which used to be unusual in American real estate, are happening in prime housing markets like California and New York. Less supply also means fewer contracts signed in a given period. Low contract activity means a lower PHSI.

In order to ensure that the housing market doesn’t fall into another “funk,” 2014 needs to see more housing starts (housing developments) than previous years. The economic downturn of 2008 caused many developers to stop progress on multiple projects. Now that the economy is in a full upswing, projects should be able to resume and supply can catch up with demand. If not, America could be headed towards another housing bubble.

Not all markets are created equal

While November saw a national increase, it was largely in part by gains in the South and West, offsetting declines in the Midwest and Northeast. Job creation and undeveloped land in the South and West have attracted a number of buyers and investors. Interested in mortgage rates in the South and West? View them on My Bank Tracker’s mortgage rates page.

 

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