Pending Home Sales declined significantly month-to-month in October, raising alarm for some. However, we can lower the red flag. The index level for September, the prior month being measured against, was especially strong and marked the high point for the entire year. In other words, the basis month was so good that it made the most recent reading look poor. On an absolute basis, the index level for the month of October ranked well against the last twelve months, and the most recent few months have been especially strong. Furthermore, Pending Home Sales were still up strongly in October when measured against October of 2018. And, the underlying fundamental factors driving homeownership, strong employment, and relatively low mortgage rates remain in place. Thus, when examined comprehensively, the latest Pending Home Sales data shows that the existing home market is still hot.
Pending Home Sales for October 2019
The National Association of Realtors (NAR) just reported its Pending Home Sales index, which measures contract signings toward the sales of existing homes, making it a forward-looking indicator for sales in the existing home market. Closings of home sales, which mark when a sale is completed and recorded, typically occur 4 to 6 weeks after contract signings. Based on the contraction indicated by the headline pending home sales data, some real estate enthusiasts may be concerned about the future. October’s index fell 1.7% versus that of September, to a seasonally adjusted index level of 106.7.
The Chief Economist of the NAR, Lawrence Yun, attributed some blame for the decline to slightly lower October housing inventory levels and slightly higher mortgage rates. I agree that higher mortgage rates could have led some homebuyers to hold back while hoping to lock in a better rate in the near future. However, real estate activity can sway month-to-month without much apparent cause; and considering that September marked an especially strong point for activity, October’s decline may not matter as much as the headline made it seem.
The fact is that the same thing happened in July of this year when the Pending Home Sales Index dropped 2.5% from 108.3 in June, to 105.6 in July. By August, all concern was erased when the index rose again to 107.1. It is important to note that while the index level can sway month-to-month, it has consistently risen significantly on a year-to-year basis. For October, contract signings rose 4.4% when measured against the prior-year period. And, for the most recent data, we can note that the last five months were all stronger for the index than the data before June. Truth be told, October’s mark still held the fourth-highest level for the last 12 months.
September’s seasonally adjusted index level mark of 108.6 was the highest of the last twelve months. It’s possible that some prospective buyers were pulled forward into September from October for some reason. We’ll have to wait until November’s data for confirmation of that, with a healthy seasonally adjusted data point probable in my opinion. After all, key fundamental factors for good demand remain in place in strong employment levels and relatively low mortgage rates. Yun agrees with this point, and he adds that general investor concern about a pending recession has dissipated as well. Let’s add to that the fact that the stock market has also been marking new highs, adding confidence to consumers.
Demand has not been the issue for housing though, and it remains that way today. Rather, supply has been an ongoing problem, and it has limited the options for homebuyers while contributing to robustly rising home prices, especially in higher demand regions. The median home price of an existing home has increased for 92 consecutive months on a year-to-year basis and was up 6.2% in October. Existing home inventory has shown itself to be chronically tight throughout this lengthy housing recovery, and it tightened further in October. Yun agrees, saying, “There is no shortage of buyers seeking homes, but a lack of available units continues to drag down the nation’s housing market and overall economy.”
Existing Home Sales data for October (closings) were reported earlier in November and showed inventory in October at 1.77 million units, which was down 2.7% from September and 4.3% from the prior-year period. At the current pace of sales, the housing supply would last just 3.9 months, down from 4.1 months in September and 4.3 months from the prior-year period. Yun indicates that builders can help to ease this stress, and I have long seen the situation as an opportunity for further new home market growth.
The inventory issue is supportive for physical real estate investors because home prices are supported and should rise further generally speaking. It should also be good news for demand for new homes. However, given the perception of a data disappointment and the hefty gains already marked for homebuilders’ shares for the year-to-date, investors did not see it that way on the day of the data release, which was Wednesday, November 27, 2019. The housing market is still strong, but it seems investors in these shares are simply going to need more evidence given valuations and significant paper gains at risk.
Physical real estate enthusiasts can lower the red flag raised by some because of the recent Pending Home Sales data release. We have seen monthly changes in contract signings sway in the past only to be resolved quickly thereafter. And, we know that September was especially strong, setting up a difficult comparable for October. Meanwhile, October’s reading was relatively strong when measured against other months, and the last five months have been better than months prior. Furthermore, Pending Home Sales have increased significantly against their prior year comparable, and the same was true for October. Importantly, the underlying fundamentals show fertile ground for expanding homeownership thanks to strong employment and low relative mortgage rates. So, real estate investors can rest easy, as this apparent data disappointment was not a red flag in my view.
Author: Markos Kaminis
Source: Seeking Alpha: Real Estate: Drop In October Pending Home Sales Not A Red Flag