The Home Buyer's Korner

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May 30th, 2015

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Pending Home Sales for March

Homes Sales

Pending home sales rose in April for the fourth straight month and reached their highest level in nine years, according to the National Association of Realtors®. Led by the Northeast and Midwest, all four major regions saw increases in April.

Total existing-home sales in 2015 are forecast to be around 5.24 million, an increase of 6.1 percent from 2014. The national median existing-home price for all of this year is expected to increase around 6.7 percent. In 2014, existing-home sales declined 2.9 percent and prices rose 5.7 percent.

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.

The index 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.

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.

The Pending Home Sales Index, increased 3.4 percent to 112.4 in April from a slight upward revision of 108.7 in March and is now 14.0 percent above April 2014 (98.6) the largest annual increase since September 2012 (15.1 percent). The index has now increased year-over-year for eight consecutive months and is at its highest level since May 2006 (112.5).

The steady gains in contract activity each month this year highlight the fact that buyer demand is strong. Foot traffic1 remains elevated this spring despite limited and in some cases severe inventory shortages in many metro areas. Homeowners looking to sell this spring appear to be in the driver’s seat, as there are more buyers competing for a limited number of homes available for sale. As a result, home prices are up and accelerating in many markets.

But the increase doesn’t guarantee large sales growth in coming months. Typically, the pending-home-sales index is a good guide to upcoming closings, leading final sales by a month or two. However, there was a notable breakdown in that relationship last month and the pace of existing-home sales dropped 3.3% in April, even though the pending gauge had climbed up throughout the first quarter of the year.

If the gap between pending sales and actual closings persists, then that could indicate an increase in cancellations. Deals are canceled for all sorts of reasons, such as financial issues and problems found during an inspection.

Some economists are concerned about whether the housing market can overcome a variety of challenges this year: Home prices are racing higher, with the number of homes for sale lagging demand in many markets, and weak income growth isn’t helping families afford ownership.

After falling four straight months, the PHSI in the Northeast bounced back solidly (10.1 percent) to 88.3 in April, and is now 9.4 percent above a year ago. In the Midwest the index increased 5.0 percent to 113.0 in April, and is 13.3 percent above April 2014.

Pending home sales in the South rose 2.3 percent to an index of 129.4 in April and are 14.8 percent above last April. The index in the West inched 0.1 percent in April to 103.8, and is 16.4 percent above a year ago.

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