Pending home sales dropped suddenly in January, falling to the lowest level in more than three years, according to the latest report from the National Association of Realtors.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, decreased 4.7% to 104.6 in January. This is down from a downwardly revised 109.8 in December, and marks the lowest point since October 2014.

“The economy is in great shape, most local job markets are very strong and incomes are slowly rising, but there’s little doubt last month’s retreat in contract signings occurred because of woefully low supply levels and the sudden increase in mortgage rates,” NAR Chief Economist Lawrence Yun said.

“The lower end of the market continues to feel the brunt of these supply and affordability impediments,” Yun said. “With the cost of buying a home getting more expensive and not enough inventory, some prospective buyers are either waiting until listings increase come spring or now having to delay their search entirely to save up for a larger down payment.”

“Even though contract signings were down, Realtors indicated that buyer traffic in most areas was up January compared to a year ago,” he said. “The exception was likely in the Northeast, where the frigid cold snap the first two weeks of the month may have contributed some to the region’s large decline.”

The number of available listings hit an all-time low for January, starting the year off 9.5% below 2017. In addition to new home construction making progress closer to its historical annual average of 1.5 million starts NAR explained two other factors must start occurring to alleviate the excruciatingly low supply levels that are slowing sales: institutional investors beginning to unload their portfolio of single-family properties back onto the market, and more hesitant homeowners deciding to sell.

“As new multifamily supply catches up with demand and slows rents, some large investors may begin putting their holdings of affordable single-family homes up for sale, which would be great news, particularly for first-time buyers,” Yun said. “Furthermore, sellers last year typically stayed in their home for 10 years before selling, an all-time high; although higher mortgage rates will likely discourage some homeowners from wanting a new home with a higher rate, there are possibly many pent-up sellers who may look to finally trade-up or move down this year.”

Existing home sales will total about 5.5 million in 2018, virtually unchanged from 2017’s 5.51 million, according to Yun’s forecast. The national median existing home price will increase about 2.7% in 2018.

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