Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

August Witnesses Slight Decline In Pending Home Sales

Written by Than Merrill

According to a report issued by the National Association of Realtors (NAR), pending home sales decreased moderately in August. However, contract signings have reached their second highest level over the course of a year. Aside from the West, which became the beneficiary of an increase for the fourth consecutive month, all major regions experienced a decline in pending home sales.

In order to quantify pending home sales, experts at the NAR turn to the Pending Home Sales Index, a forward-looking indicator based on contract signings. According to the index, pending home sales declined 1.0%. The decrease places pending home sales at a modest 104.7 on the index in August. For comparisons, an index of 100 is equal to the average level of contract activity during 2001, which was the first year the index was implemented. So despite the drop, contract activity remains relatively healthy. Perhaps even more importantly, contract activity is predicted to improve sooner rather than later.

Lawrence Yun, chief economist at the NAR, has acknowledged that contract signings are holding steady. Fewer distressed sales and less investor activity is likely behind the recent August decline. “Fewer distressed homes at bargain prices and the acknowledgement we’re entering a rising interest rate environment likely caused hesitation among investors last month,” he said. “With investors pulling back, the market is shifting more towards traditional and first-time buyers who rely on mortgages to purchase a home.”

The recent decline in pending home sales may be attributed to a distinct lack of first-time buyers. Overall, first-time homebuyers have been less prevalent from the housing recovery, representing less than a third of all buyers each month for the past two years. They have simply been unable to participate in the market, as homes are too expensive. Fortunately, encouraging signs have signaled an end to their financial struggles. The crisis that has burdened millennials for years appears to be easing. Experts predict that a strengthening labor force will allow millennials to contribute to the housing market within two to five years. The influx of new buyers is expected to stimulate the U.S. housing sector and should boost pending home sales.

Yun says first-time buyer participation should gradually improve despite tight credit conditions and the inevitable rise in rates. “The employment outlook for young adults is brightening and their incomes finally appear to be rising,” he said. “Jobs and income gains will help repay student debt and better position first-time buyers, setting the stage for improved sales growth in upcoming years.”

For the time being, the pending home sales index for the Northeast dropped 3.0% to 86.5. Despite the drop, pending home sales in the region are still 1.6% higher than they were at this time last year. The Midwest, on the other hand, saw a slightly smaller decline, as pending home sales decreased 2.1% on the index to rest at 102.4. Pending home sales in the South decreased 1.4 percent to an index of 117.0 in August, unchanged from a year ago. The index in the West rose for the fourth consecutive month (2.6 percent) in August to 102.1, but still remains 2.6 percent below August 2013.

The rise in millennial homeownership may take hold in cities where jobs are already plentiful and the cost of living is cheaper. Cities in Texas and North Carolina, in particular, are potential candidates to kick-start the millennial buying craze. Experts have already predicted that these regions should expect to see pending home sales increase in the near future.

Existing-home sales are expected to be stronger in the second half of the year behind improved inventory conditions, continuously low interest rates and slower price growth. Overall, Yun forecasts existing-homes sales to be down 3.0 percent this year to 4.94 million, compared to 5.09 million sales of existing homes in 2013. The national median existing-home price is projected to grow between 5 and 6 percent this year and 4 and 5 percent next year.