Pending Sales at 10-Month High, but Weakening in The West

Pending home sales rose for the second straight month in March although the increase was less than in February.  The National Association of Realtors® said on Wednesday that its Pending Home Sales Index (PHSI) rose 1.4 percent in March to 110.5.  The increase in February was 3.5 percent. 

The March gain brought the index up by 1.4 percent from a year earlier as well, making March the 19th consecutive month in which the index has increased on an annual basis and to its highest reading since May 2015 when it was 111.0.  The February PHSI, originally reported at 109.1 was revised slightly to 109.0

The PHSI is a forward looking indicator based on contracts signed for the purchase of existing homes.  Those pending contracts are generally expected to close as sales within two months.

Analysts polled by Econoday had provided a very wide range of predictions for today's report, ranging from no change from February to a 2.7 percent increase.  The consensus was 0.5 percent.

Lawrence Yun, NAR chief economist, says last month's pending sales increase signals a solid beginning to the spring buying season. "Despite supply deficiencies in plenty of areas, contract activity was fairly strong in a majority of markets in March," he said. "This spring's surprisingly low mortgage rates are easing some of the affordability pressures potential buyers are experiencing and are taking away some of the sting from home prices that are still rising too fast and above wage growth."

In the short-term, the healthy labor market and favorable borrowing costs should lead to sustained buyer demand and a durable pace of sales. However, Yun says the consequences from a failure to construct more single-family homes in recent years are starting to impact some top job producing markets, where endless supply shortages continue to limit choices for buyers and are driving up prices beyond what a growing share of households can comfortably afford.

"Demand is starting to weaken in some areas, particularly in the West, where the median home price has risen an astonishing 38 percent in the past three years," adds Yun. "As a result, pending sales in the region have now declined in four of the last five months and are lower than one year ago for the third month in a row. Closed sales in the region in March were also below last year's pace."

Contract signings rose in three regions compared to March; the West saw a decline in both monthly and yearly figures.  The index for that region was down 1.8 percent in March to 95.3, and is now 7.9 percent below a year ago.

The South saw pending sales rise 3.0 percent month-over-month but the region still lagged its March 2015 number by 0.6 percent.  The Northeast had an increase of 3.2 percent to 97.0 in March, and an 18.4 percent annual gain.  In the Midwest the index inched up 0.2 percent to 112.8, 4.0 percent higher than a year earlier.  The Pending Home Sales 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.