Pending home sales in October dropped 2.6% to a reading of 102.1 on the National Association of Realtors Pending Home Sales Index, down from 104.8 in September and off 6.7% from a year earlier, the tenth straight month of annual decreases.
Lawrence Yun, NAR chief economist, said that ten straight months of decline certainly isn’t favorable news for the housing sector. “The recent rise in mortgage rates have reduced the pool of eligible home buyers,” he said. Yun notes that a similar period of decline occurred during the 2013 Taper Tantrum when interest rates jumped from 3.5% to 4.5%. After 11 months – November 2013 to September 2014 – sales finally rebounded when rates decreased. “But this time, interests rates are not going down, in fact, they are probably going to increase even further,” Yun noted.
While the short-term outlook is uncertain, Yun stressed that he is very optimistic about the long-term outlook. The current home sales level matches sales in 2000. “However, mortgage rates are much lower today compared to earlier this century, when mortgage rates averaged 8%. Additionally, there are more jobs today than there were two decades ago,” said Yun. “So, while the long-term prospects look solid, we just have to get through this short-term period of uncertainty.”
Likewise, Mortgage Bankers Association Chief Economist Mike Fratantoni sees the dip as more of a pause than a trend: “We continue to view the current slowdown in the housing market, led by a halt in October contract signings in the West, as a healthy deceleration in the market. Home prices had galloped ahead of wage growth for too long, particularly in the coastal markets. Now, with the job market quite strong, and sellers recalibrating how aggressive to be with list prices, the housing market is seeking to find its footing. However, while inventory remains tight, the underlying demand fundamentals remain strong. We expect the pause in activity to end next year.”
“We continue to view the current slowdown in the housing market, led by a halt in October contract signings in the West, as a healthy deceleration in the market. Home prices had galloped ahead of wage growth for too long, particularly in the coastal markets. Now, with the job market quite strong, and sellers recalibrating how aggressive to be with list prices, the housing market is seeking to find its footing. However, while inventory remains tight, the underlying demand fundamentals remain strong. We expect the pause in activity to end next year.”
All four major regions saw a decline when compared to a year ago, with the West seeing the most pronounced drop. Yun said that decline is not at all surprising. “The West region experienced the fastest run-up in home prices in a short time and therefore, has essentially priced out many consumers,” Yun said.
The PHSI in the Northeast rose 0.7% to 92.9 in October, and is now 2.9% below a year ago. In the Midwest, the index fell 1.8% to 100.4 in October and is 4.9% lower than October 2017. Pending home sales in the South fell 1.1% to an index of 118.9 in October, which is 4.6% lower than a year ago. The index in the West decreased 8.9% in October to 84.8 and fell 15.3% below a year ago.
Yun suggests that the Federal Reserve should be less aggressive in raising rates. He cites the collapse in oil prices and the decrease in gasoline prices. “The inflationary pressure is all but disappearing. Given that condition, there is less of a need to aggressively raise interest rates. Looking at the broader economy and keeping in mind that the housing sector is a great contributor to the economy, it would be wise for the Federal Reserve to slow the raising of rates to see how inflation develops.”
Yun pointed to year-over-year increases in active listings from data at realtor.com® to illustrate a potential rise in inventory. Denver-Aurora-Lakewood, Colo., Seattle-Tacoma-Bellevue, Wash., Columbus, Ohio, San Francisco-Oakland-Hayward, Calif. and San Diego-Carlsbad, Calif. saw the largest increase in active listings in October compared to a year ago.
Yun expects existing-home sales this year to decrease 3.1% to 5.34 million, and the national median existing-home price to increase 4.7%. Looking ahead to next year, existing sales are forecast to decline 0.4% and home prices to drop roughly 2.5%.
