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Pending home sales: Fewer homes being sold for first time in 2 years

Affordability and lack of inventory hindering home sales

Home sales went up consistently for the past three months, however in May they declined monthly, and for the first time in about two years, they declined yearly, according to the National Association of Realtors.

In fact, all four major regions saw a decrease in contract activity in May.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, decreased by 3.7% to 110.8 in May, down from April’s revised 115. Even with this decline, it is still the third highest index reading in the past year, however it is also the first yearly decline since August of 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. An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined; 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. 

“With demand holding firm this spring and homes selling even faster than a year ago, 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,” NAR Chief Economist Lawrence Yun 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,” Yun said.

And this doesn’t look like it will change anytime soon. In fact, experts predict that a new wave of Baby Boomers moving into the cheaper housing markets could make affordable homes even harder to come by in the coming years.

Mortgage rates are at their all-time lows, however the low supply and rising home prices are making it difficult on homebuyers, and preventing what should be a more robust pace of sales, Yun said.

Home prices continue to increase nationwide, even hitting new highs in several large housing markets in April, according to S&P Dow Jones Indices Case-Shiller Home Prices Indices.  

“Total housing inventory at the end of each month has remarkably decreased year-over-year now for an entire year,” Yun said. “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.”

In the second half of this year, the Brexit decision could either prove beneficial or cause problems in the housing market, Yun said.

“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 home buying.”

While many believe that Brexit could lead to all-time lows for mortgage interest rates, others still predict that the Fed will raise rates by the end of this year.

All regions experienced a decrease from last month. The PHSI in the Northeast decreased 5.3% to 93 in May, unchanged from last year, while the Midwest PHSI fell 4.2% to 108, a decrease of 1.8% from last year. In the South, the PHSI decreased 3.1% to 126.6, which is an increase of 0.6% from last year, while the West PHSI decreased 3.4% to 102.6, a decrease of 0.1% from last year. 

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