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Pending Home Sales Increase: Rebound or Not?

hands-writing-BHSolid increases in pending home sales in the south and west offset slower sales in the northeast and Midwest leading to an overall uptick in December, according to data [1] released by the National Association of Realtors (NAR) [2].

The NAR’s Pending Home Sales Index, a forward-looking indicator based on contract signings, increased by 1.6 percent to 109.0 in December from 107.3 in November. This puts the index .3 percent above its level in December 2015, which was 108.7.

NAR’s Chief Economist Lawrence Yun said contract activity throughout the country was mixed in December, but finished strong to end the year positively.

"Pending sales rebounded last month as enough buyers fended off rising mortgage rates and alarmingly low inventory levels to sign a contract," Yun said. "The main storyline in the early months of 2017 will be if supply can meaningfully increase to keep price growth at a moderate enough level for households to absorb higher borrowing costs. Sales will struggle to build on last year's strong pace if inventory conditions don't improve."

Dr. Joseph Kirchner, Senior Economist with Realtor.com, urged industry monitors to not take December’s rise as indicative of a surge in sales.

Kirchner said the uptick in the pending sales home index is “merely oscillation around a seven-month downward trend” and doesn’t make up for November’s year over year decline of .4 percent.

“The most important factor contributing to the declining trend in pending sales is lack of supply, which has made it difficult for buyers to find a home that meets their needs,” Kirchner said. “The persistent trend of price appreciation exceeding income appreciation means homes on the market become less affordable every month. The decline in pending sales began in May, several months prior to mortgage rate hikes, so rising mortgage are not yet a dominant factor in the decline in pending sales.”

Yun said a large percentage of the overall housing supply right now is at the upper end of the market, as evident from sales data showing homes sold at or above $250,000 increased by 10 percent. Meanwhile, homes sold between $100,000 and $250,000 only increased 2.3 percent.

"The dismal number of listings in the affordable price range is squeezing prospective first-time buyers the most," Yun said. "As a result, young households are missing out on the wealth gains most homeowners have accrued from the 41 percent cumulative rise in existing home prices since 2011."

NAR experts expect existing home sales climb by 1.7 percent from 2016 to 5.54 million this year. Last year itself was the best year for home sales since 2006. National median existing home price are expected to rise by 4 percent.

“Especially if construction-related regulations are relaxed, all eyes will be on the homebuilding industry this year to see if they can finally start making up lost ground on the severe housing shortages impacting much of the country,” Yun said.