Following a period of encouraging activity, the housing sector has begun to show signs of slowing down. Rapid appreciation rates, in association with higher mortgage interest rates, have curbed buying power amidst prospective homeowners. As a result, September witnessed pending home sales decline for a fourth consecutive month. According to the Pending Home Sales Index, a forward-looking indicator associated with contract signings, pending home sales dropped 5.6 percent in September.
The index, a compilation of data presented by the National Association of Realtors (NAR), has identified a year-over-year decrease in pending home sales. That is to say, fewer contracts have been signed this year. This time last year, the index sat at 102.8. However, recent trends have caused pending home sales to drop by 1.2 percent and now sit at 101.6. Current data reflects the lowest amount of signed contracts since December of 2012.
According to Lawrence Yun, NAR chief economist, the drop in pending home sales is partially attributed to the recent government shutdown. “Declining housing affordability conditions are likely responsible for the bulk of reduced contract activity,” he said. “In addition, government and contract workers were on the sidelines with growing insecurity over lawmakers’ inability to agree on a budget. A broader hit on consumer confidence from general uncertainty also curbs major expenditures such as home purchases.”
Of particular concern, however, is the direction pending home sales have been trending over the last four months. September marked the first time in 29 months that pending home sales failed to surpass year-ago levels. Ultimately, the decline should serve as a precursor to 2014. Not only should we expect lower home sales at the end of 2013, but 2014 may start off slower than originally anticipated.
On a national level, the Pending Home Sales Index dropped, but individual regions experienced different fluctuations:
- In the Northeast, the index dropped 9.6 percent to 76.7 in September, and is 6.4 percent below a year ago.
- In the Midwest, the index dropped 8.3 percent to 102.3 in September, but is 5.7 percent higher than a year ago.
- In the South, the index dropped 0.4 percent to 116.2 in September, and is 2.0 percent higher than a year ago.
- The index in the West dropped 9.0 percent in September to 97.3, and is 9.8 percent lower than September 2012.
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.
It is important to remember that pending home sales do not represent a closing, but the signing of a contract. Conversely, existing-home sales are expected to be 10 percent higher than they were at the end of 2012. Analysts familiar with the market project existing-home sales to reach 5.1 million before the end of the year. The progression is expected to continue into 2014.
The national median existing-home price is expected to rise 11 to 11.5 percent for all of 2013, but moderate to a 5 to 6 percent gain in 2014.