The Pending Home Sales Index is a leading indicator of housing activity. It measures housing contract activity and is based on signed real estate contracts for existing single-family homes, condos, and co-ops. When a seller accepts a sales contract on a property, it is recorded into a Multiple Listing Service (MLS) as a “pending home sale.” Most pending home sales become home sale transactions, typically one to two months later.
The Pending Home Sales Index Explained
The Pending Home Sales Index is a leading indicator for the housing sector, based on pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not closed, though the sale usually is finalized within one or two months of signing. Pending contracts are good early indicators of upcoming sales closings. However, the amount of time between pending contracts and completed sales is not identical for all home sales.
Variations in the length of the process from pending contract to closed sale can be caused by issues such as buyer difficulties with obtaining mortgage financing, home inspection problems, or appraisal issues. According to the National Association of REALTORS®, the index is based on a sample that covers about 40% of multiple listing service data each month.
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 equals 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.
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Pending Home Sales Tumbled 7.1% in August
The real estate market in the United States experienced a significant setback in August, with pending home sales declining by 7.1%. This data, released by the National Association of REALTORS® (NAR) on September 28, 2023, paints a concerning picture for the housing industry. Factors such as rising mortgage rates and a shifting landscape of buyer expectations have contributed to this decline.
Understanding the Decline
“Mortgage rates have been rising above 7% since August, which has diminished the pool of home buyers,” said Lawrence Yun, NAR chief economist. “Some would-be home buyers are taking a pause and readjusting their expectations about the location and type of home to better fit their budgets.”
- Pending home sales slumped in August, down 7.1% from July.
- High interest rates have pushed mortgage rates above 7%, which has impacted home buying.
- Pending home sales dropped in all four U.S. regions month-over-month and compared to one year ago.
The Pending Home Sales Index (PHSI) – a forward-looking indicator of home sales based on contract signings – sank 7.1% to 71.8 in August. Year over year, pending transactions fell by 18.7%. An index of 100 is equal to the level of contract activity in 2001.
“It's clear that increased housing inventory and better interest rates are essential to revive the housing market,” added Yun.
Pending Home Sales Regional Breakdown
The Northeast PHSI declined 0.9% from last month to 62.6, a reduction of 18.2% from August 2022. The Midwest index dropped 7.0% to 71.3 in August, down 19.1% from one year ago.
The South PHSI fell 9.1% to 86.5 in August, dipping 17.6% from the prior year. The West index retreated 7.7% in August to 56.3, sinking 21.4% from August 2022.
“The Federal Reserve must consider the sharply decelerating rent growth in its consideration of future monetary policy. There is no need to raise interest rates. Moreover, the government shutdown will disrupt some home sales in the short run due to the lack of flood insurance or delays in government-backed mortgage issuance,” said Yun.
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Pending Home Sales Trends (Previous Months)
The table shows data from regarding pending home sales in four regions of the United States – Northeast, Midwest, South, and West. The data reveals interesting trends in pending home sales across the regions. The National Association of Realtors (NAR) publishes monthly data on pending home sales, which is seasonally adjusted and presented in the form of a seasonally adjusted annual rate (SAAR) in thousands.
July 2023 Pending Sales Data
In July, pending home sales in the US edged up by 0.9%, marking a second consecutive monthly increase despite the challenges of soaring home prices and rising mortgage rates. This unexpected growth contradicted market expectations of a decline from June. However, in a year-over-year comparison, pending transactions still experienced a 14% decrease.
Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), acknowledged the potential for further upticks in contract signings, emphasizing the impact of multiple lost home-buying opportunities. While the economy's vigor leads to rising rates, adding more jobs enlarges the pool of potential home buyers.
Despite these positive aspects, elevated mortgage rates and limited housing inventory have momentarily impeded buying opportunities for many. Regionally, the Northeast and Midwest witnessed declines of 5.8% and 0.4% respectively, while the South saw a 2% increase, and the West experienced a significant 6.2% surge from June, driven by a noteworthy price decline in the past year.
June 2023 Pending Sales Data
The data for June 2023 provides a snapshot of pending home sales in the various regions. In the Northeast, pending home sales stood at 67.1. Meanwhile, the Midwest saw a higher figure of 77.6, and the South recorded even stronger numbers at 93.3. The West region lagged behind with pending home sales at 57.7. In total, the overall pending home sales index rested at 76.8.
The month-over-month changes offer insights into the short-term shifts in pending home sales. The Northeast experienced a modest increase of 0.60%. On the other hand, the Midwest region saw a more substantial rise of 4.30%. However, both the South and West regions faced declines, with -1.17% and -1.20% respectively. Across all regions, the total change in pending home sales was 0.39%.
Comparing the pending home sales data from June 2023 with the same period of the previous year unveils the broader trend. The Northeast and Midwest both exhibited similar year-over-year drops, with -17.06% and -17.18% respectively. The South region experienced a somewhat milder decline of -13.85%. The West, while still affected, displayed a year-over-year change of -16.01%. When combining data from all regions, the total year-over-year change in pending home sales was -15.60%.
Here is the tabular data of pending home sales from June 2022 to June 2023. The units displayed are in thousands and are the seasonally adjusted annual rate.