Pending Home Sales Up 7.5% In October: Is That Good News Or Is There An Underlying Problem?

Pending home sales rebounded in October after a decline the month before, according to new data released by the National Association of Realtors (NAR).

What Happened: NAR’s Pending Home Sales Index (PHSI), a forward-looking indicator of home sales based on contract signings, rose 7.5% from September to October, reaching a 125.2 level — an index of 100 is equal to the level of contract activity in 2001. This is the highest PHSI level recorded in 2021.

On a month-over-month regional measurement, the strongest level of pending home sale activity was in the Midwest, where the PHSI rose by 11.8% to 124.6 in October, and in the South with an 8% uptick to an index of 149.7.

The index in the West grew 2.1% in October to 107.5 while the Northeast recorded a 6.9% increase to an index of 99.5.

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What It Means: NAR Chief Economist Lawrence Yun observed that an anticipated increase in mortgage rates coupled with increased costs for rental housing is encouraging more homebuying, despite historically low inventory. He also predicted October’s robust pending home sales data will fuel the housing market to a new peak.

“The notable gain in October assures that total existing-home sales in 2021 will exceed 6 million, which will shape up to be the best performance in 15 years,” Yun said.

What Needs To Be Considered: Despite the vibrant monthly increase in contract signings, on a year-over-year measurement October’s PHSI was down by 1.4%.

Dr. Anthony B. Sanders, distinguished professor of real estate finance at George Mason University and director and former head of asset-backed and mortgage-backed securities research at Deutsche Bank AG DB, observed that October marked the fifth straight month of year-over-year declines in the PHSI and warned that many prospective buyers are unable to gain a foothold in the housing market, especially when inventory levels are one-third lower than the levels recorded in 2010.

“Competition over a scant number of listings — particularly on the lower, more affordable end of the resale market — has pushed prices out of reach for many prospective buyers,” Sanders wrote in his influential Confounded Interest blog. “Builders have struggled to fill the void as supply-chain delays and labor shortages upend construction schedules, exacerbating the inventory crunch.”

Sanders affirmed Yun’s prediction of a home sales reaching their best level since 2006, although he observed that the housing market has a little help from a big friend.

“Yes, humongous stimulus from The Federal Reserve will help push existing home sales to exceed 6 million in 2021,” he said.

Photo: Mohamed Hassan / Pixabay