WASHINGTON (June 29, 2016) — After steadily increasing for three straight months, pending home sales let up in May and declined year-over-year for the first time in almost two years, according to the National Association of Realtors®. All four major regions experienced a cutback in contract activity last month.
The Pending Home Sales Index,* a forward-looking indicator based on contract signings, slid 3.7 percent to 110.8 in May from a downwardly revised 115.0 in April and is now slightly lower (0.2 percent) than May 2015 (111.0). With last month’s decline, the index reading is still the third highest in the past year, but declined year-over-year for the first time since August 2014.
Lawrence Yun, NAR chief economist, says pending sales slumped in May across most of the country. “With demand holding firm this spring and homes selling even faster than a year ago1, the notable increase in closings in recent months took a dent out of what was available for sale in May and ultimately dragged down contract activity,” he said. “Realtors® are acknowledging with increasing frequency lately that buyers continue to be frustrated by the tense competition and lack of affordable homes for sale in their market.”
Despite mortgage rates hovering around three-year lows for most of the year, Yun says scant supply and swiftly rising home prices – which surpassed their all-time high last month2 – are creating an availability and affordability crunch that’s preventing what should be a more robust pace of sales.
“Total housing inventory at the end of each month has remarkably decreased year-over-year now for an entire year3,” adds Yun. “There are simply not enough homes coming onto the market to catch up with demand and to keep prices more in line with inflation and wage growth.”
Looking ahead to the second half of the year, Yun says the fallout from the U.K.’s decision to leave the European Union breeds both immediate opportunity as well as potential headwinds for the U.S. housing market.
“In the short term, volatility in the financial markets could very likely lead to even lower mortgage rates and increased demand from foreign buyers looking for a safer place to invest their cash,” he said. “On the other hand, any prolonged market angst and further economic uncertainty overseas could negatively impact our economy and end up tempering the overall appetite for homebuying.”
In spite of last month’s step back in contract signings, existing-home sales this year are still expected to be around 5.44 million, a 3.7 percent boost from 2015. After accelerating to 6.8 percent a year ago, national median existing-home price growth is forecast to slightly moderate to between 4 and 5 percent.
The PHSI in the Northeast dropped 5.3 percent to 93.0 in May, and is now unchanged from a year ago. In the Midwest the index slipped 4.2 percent to 108.0 in May, and is now 1.8 percent below May 2015.
Pending home sales in the South declined 3.1 percent to an index of 126.6 in May but are still 0.6 percent higher than last May. The index in the West decreased 3.4 percent in May to 102.6, and is now 0.1 percent below a year ago.
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.1 million members involved in all aspects of the residential and commercial real estate industries.
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1 According to the May Realtors® Confidence Index, properties typically stayed on the market for 32 days, which is below a year ago (40 days) and the shortest time since NAR began tracking in May 2011.
2 Surpassing the peak median sales price set last June ($236,300), the median existing-home price for all housing types in May was $239,700.
3 Total housing inventory at the end of May was at 2.15 million existing homes available for sale, which was 5.7 percent lower than a year ago (2.28 million). The last year-over-year increase in total housing inventory was last May (2.28 million vs. 2.25 million in May 2014).
*The Pending Home Sales Index is a leading indicator for the housing sector, based on pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not closed, though the sale usually is finalized within one or two months of signing.
The index 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.
NOTE: NAR’s 2016 Profile of International Home Buying Activity is scheduled for July 6, the next Housing Opportunities and Market Experience (HOME) survey will be released on July 13, Existing-Home Sales for June will be reported July 21, and the next Pending Home Sales Index will be July 27; all release times are 10:00 a.m. ET.