Pending home sales fell in October after two months of gains because of a shortage of properties on the market, the National Association of Realtors said on Wednesday.
The seasonally adjusted index measuring signed contracts fell 1.7% from the prior month, NAR said. It’s a frustrating data point for economists, who expected mortgage rates near multi-year lows coupled with a strong labor market to translate into a higher level of contract signings.
“It’s two steps forward, one step back,” NAR Chief Economist Lawrence Yun said in an interview. “All the factors that contribute to higher home sales like the job situation are terrific, and of course mortgage rates are critical to buying a home and those are favorable. All the factors are lined up in a way that means we should be having gangbuster homes sales.”
The biggest reason for the fallback is a shortage of homes for sale, he said. The so-called “months supply” of properties on the market, measuring the amount of time it would take to sell off existing inventory, fell to 3.9 in October, Yun said. That matched the October 2017 reading that was the lowest level since the data series began in 1999, he said.
Most economists consider a 6 months supply to be a balanced market.
Demand for housing is high, Yun said, but there’s not enough inventory to meet it, especially at the entry-level price point. Move-up buyers, meaning people who have a home to sell when they purchase their next property, are stymied by a lack of home building, he said.
The drop in pending home sales “is clearly due to inventory shortage at the lowest price point,” Yun said. “Some of the trade-up buyers, who often are buying new homes and releasing that entry-level existing home inventory to the market, aren’t making a move.”
Sales of new homes in 2019 probably will total 678,000, Yun said. That would be a gain of almost 10% from last year, but it’s still far below historical levels, he said.
Homebuilders still haven’t recovered from the housing bust a decade ago, Yun said. If you take out the run-up to the housing bubble and the ensuing crash, the increase in new-home sales Yun is forecasting for 2019 would put the market back to levels seen in 1990s.
“The new-home sale market showing some growth in building activity, so maybe it will start trickling down so we see more existing-home inventory show up, but so far it hasn’t,” Yun said.