Pending home sales decline for third straight month

Pending home sales declined for the third straight month in August, the National Association of Realtors reported this morning. 

The Pending Home Sales Index (PHSI) fell 2% to 88.4 in August. Year-over-year, pending transactions dropped by 24.2%.  The PHSI is a forward-looking indicator of home sales based on contract signing and an index of 100 is equal to the level of contract activity in 2001.

“The direction of mortgage rates – upward or downward – is the prime mover for home buying, and decade-high rates have deeply cut into contract signings,” said NAR Chief Economist Lawrence Yun. “If mortgage rates moderate and the economy continues adding jobs, then home buying should also stabilize.”

Yun noted that he expects the economy will remain sluggish throughout the remainder of this year, with mortgage rates rising to close to 7% in the coming months.

“Only when inflation calms down will we see mortgage rates begin to steady,” said Yun.

Given the current interest rate environment and weaker economic activity, the NAR said it expects existing-home sales to decline 15.2% in 2022, to 5.19 million units, while new home sales are projected to fall by 20.9%.

Limited housing inventory and almost non-existent distressed property sales have supported home prices. Overall, the NAR forecasts prices will rise by 9.6% in 2022.

In 2023, Yun foresees slower price appreciation and corresponding increases in sales as the year progresses.

“Next year, the annual median home price is expected to rise by only 1.2%,” Yun added. “Home sales will pick up in the second half of 2023, but will be down by 7.1% overall.”      

Here’s how the PHSI breaks down by region:

• The Northeast PHSI decreased 3.4% from last month to 76.6, down 19.0% from August 2021. 
• The Midwest index fell 5.2% to 88.4 in August, a 21.1% drop from the previous year.
• The South PHSI slid 0.9% to 105.4 in August, a decline of 24.2% from a year ago. 
• The West index rose by 1.4% in August to 71.0, down 31.3% from August 2021.

“Home prices are the least affordable in the West and, consequently, the region suffered deeper annual declines in contract signings due to rising interest rates when compared to other areas of the country,” Yun added. “However, the recent increases of the last two months, though small, are encouraging.”

Surprisingly the U.S. Census Bureau and the U.S. Department of Housing and Urban Development reported yesterday that new single-family homes sales jumped 28.8% to a seasonally adjusted annual rate of 685,000 compared to the revised July rate of 532,000.