January marked the fifth straight
month that the National Association of Realtors® (NAR) has reported a decline
in its Pending Home Sales Index (PHSI). The index, based on newly signed
contracts for the purchase of existing homes, was down 2.8 percent from its
December level.

The index in January was at
122.8 compared to 125.5 in December and has lost 10 points since August. Still,
pending sales were up 13 percent compared to a year earlier. This January’s
PHSI was, in fact, the highest for any January on record.  

Analysts had expected the index to be
flat but individual estimates by those polled by Econoday all overshot the
actual results. They covered a range from a 1.5 percent downturn to 0.5 percent
growth. The consensus was for zero change.

“Pending home sales fell in January
because there are simply not enough homes to match the demand on the market,”
said Lawrence Yun, NAR’s chief economist. “That said, there has been an
increase in permits and requests to build new homes.” Yun said that increase in
single-family permits has been consistent for eight months and is a good sign
that the supply and demand imbalance in the residential real estate market
could be easing as soon as mid-2021.

“There will also be a natural
seasonal upswing in inventory in spring and summer
after few new listings
during the winter months,” he said. “These trends, along with an anticipated
ramp-up in home construction will provide for much-needed supply.”

Following a week where January’s
existing-home sales increased, Yun noted that pending contracts are a great
early indicator for upcoming closed sales but stressed that the timing of the
relationship between existing-home sales and pending home sales may not be in
lockstep.

“The two measurements aren’t always
perfectly correlated due to varying amounts of time required to close a
contract,” Yun said. “This is because a number of fallouts can occur due to a
variety of factors, including a buyer not obtaining mortgage financing, a
problem with a home inspection, or an appraisal issue.”

He noted that the economy is showing
promising signs of improvement, and many millions of Americans are now receiving
a COVID-19 vaccination. Still, he cautioned that the better economic outlook,
rising inflation prospects and higher budget deficits will soon drive increases
in interest rates. “I don’t foresee mortgage rates jumping to an alarming
level,” he said, “but we should prepare for a rise of at least a decimal point
or two.”

The Northeast PHSI fell 7.4 percent to 101.6 in January, putting it 9.6 percent higher than a year earlier. In the Midwest, the index declined 0.9 percent to 113.2, up 8.6
percent from January 2020.

Pending home sales transactions in
the South inched up 0.1 percent to an index of 151.3 in January and were 17.1
percent higher year-over-year. The index in the West was at 104.6, a 7.8
percent drop from December but up 11.5 percent from a year prior.

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. Existing home sales numbers
for February will be released on March 22.

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.

By Jann Swanson , dated 2021-02-25 10:47:49

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Courtesy of Mortgage News Daily

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