Pending home sales dropped for the 3rd straight month in August and the 7th drop of 2022.
It’s another sign that the Fed’s campaign to rein in the effects of high inflation appear to be sending a critical industry into recession. https://www.axios.com/2022/09/29/housing-affordability-income-sales-decline
According to the National Association of Realtors, 3 out of the 4 major regions across the country experienced month-over-month decreases in sales (the West saw a minor gain). All 4 regions saw double-digit declines.
The NAR’s Pending Home Sales Index, a forward-looking indicator of home sales based on contract signings, fell 2.0% to 88.4 in August. Year-over-year, pending transactions dwindled by 24.2%.
An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined.
The PHSI is a leading indicator for the housing sector, based on pending sales of existing homes.
A sale is pending when a contract has been signed, but the transaction has not closed (the sale usually is finalized within one or two months of signing).
According to NAR, pending contracts are considered good early indicators of upcoming sales closings.
Variations in the length of that process – from pending contract to closed sale – are caused by difficulties with buyers getting a mortgage, home inspection issues, or appraisal issues.
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 over 20 years ago, it was shown that the level of monthly sales-contract activity matches the level of closed existing-home sales in the following two months.
Coincidentally, the volume of existing-home sales in 2001 fell in the range of 5.0-5.5 million, which is considered normal for the nation’s current population.
By Dave Allen for Discount Gold & Silver
Pending home sales dropped for the 3rd straight month in August and the 7th drop of 2022.
It’s another sign that the Fed’s campaign to rein in the effects of high inflation appear to be sending a critical industry into recession. https://www.axios.com/2022/09/29/housing-affordability-income-sales-decline
According to the National Association of Realtors, 3 out of the 4 major regions across the country experienced month-over-month decreases in sales (the West saw a minor gain). All 4 regions saw double-digit declines.
The NAR’s Pending Home Sales Index, a forward-looking indicator of home sales based on contract signings, fell 2.0% to 88.4 in August. Year-over-year, pending transactions dwindled by 24.2%.
An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined.
The PHSI is a leading indicator for the housing sector, based on pending sales of existing homes.
A sale is pending when a contract has been signed, but the transaction has not closed (the sale usually is finalized within one or two months of signing).
According to NAR, pending contracts are considered good early indicators of upcoming sales closings.
Variations in the length of that process – from pending contract to closed sale – are caused by difficulties with buyers getting a mortgage, home inspection issues, or appraisal issues.
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 over 20 years ago, it was shown that the level of monthly sales-contract activity matches the level of closed existing-home sales in the following two months.
Coincidentally, the volume of existing-home sales in 2001 fell in the range of 5.0-5.5 million, which is considered normal for the nation’s current population.
Rates Expected to Rise Further
The Realtors’ chief economist Lawrence Yun observed, "The direction of mortgage rates – upward or downward – is the prime mover for home buying, and decade-high rates have deeply cut into contract signings.
"If mortgage rates moderate,” he added, “and the economy continues adding jobs, then home buying should also stabilize." Wishful thinking, I do believe.
Even Yun expects the economy to remain lethargic the rest of 2021, with mortgage rates heading to around 7% in the coming months.
Those rates vary somewhat, depending on who’s reporting, but CNET reports that the average rate across the U.S. as of today is 6.85%.
Yun warned, "Only when inflation calms down will we see mortgage rates begin to steady."
Because of rising interest rates and slower economic activity, NAR expects existing-home sales to fall 15.2% this year, to just shy of 5.2 million units, while they project new home sales to fall by 20.9%.
Yun notes that limited housing inventory and almost non-existent distressed property sales have supported home prices. Overall, he forecasts prices will rise by 9.6% in 2022.
Yun foresees slower price appreciation and corresponding increases in sales in 2023 as the year progresses.
He added, "Next year, the annual median home price [will] rise by only 1.2%. Home sales will pick up in the second half of 2023, but will be down by 7.1% overall."
The Northeast PHSI decreased 3.4% in August to 76.6, down 19.0% from a year earlier. The Midwest index fell 5.2% to 88.4, a 21.1% drop from 2021.
The South PHSI slid 0.9% to 105.4 in August, a decline of 24.2% from a year ago. On the other hand, the West index rose by 1.4% – but only to 71.0 – down 31.3% from August 2021.
Yun reported, "Home prices are the least affordable in the West and, consequently, the region suffered deeper annual declines in contract signings…when compared to other areas of the country."
Yun added. "However, the recent increases of the last two months, though small, are encouraging."
Are High Prices Putting the Dream Out of Reach?
As Melody Cedarstrom and I have been discussing on Financial Survival, rising mortgage rates have already put high home prices out of reach for a lot of people – especially first-time, and primarily younger, buyers.
The chart above explains a lot. As Emily Peck points out, “The minimum income needed to afford a typical house doubled since 2020 in several major metro areas,” according to Zillow data.
Zillow’s analysis shows that the challenge is biggest in Tampa, Florida, where it now takes $72,255 in earnings to spend 30% of monthly household earnings on the typical mortgage payment.
In 2020, right before the pandemic began, it only took $32,472. That’s an astounding increase of almost $40,000, or 123%, in only two years’ time.
Austin, Texas, came in 2nd, with an increase of 116% in required income, followed by Jacksonville, Florida, at 114%.
Rounding out the top 10 are Raleigh, NC; Miami, FL; Charlotte, NC; Nashville, TN; Orlando, FL; and Atlanta, GA and Phoenix, AR (tied for 10th).
In the U.S. as whole, the numbers are $65,714 in 2022 vs. $34,976 in 2020 – an increase of about $31,000 or 88%.
Peck says, “Prices for houses are, honestly, bananas compared to where they were just a couple of years ago.”
Pending home sales are at their lowest levels since 2011, except for a brief period in 2020 when the country went into lockdown, according to Augusta Saraiva.
All in all, the Fed’s QT has begun to have several early impacts, some intended, others not so much so. But give them time – overreach is their MO and clearly within their grasp.