Pending Home Sales Maintain Momentum in May

Pending home sales continued to rise in May and are now at their highest level in over nine years, according to the National Association of Realtors. Gains in the Northeast and West were offset by small decreases in the Midwest and South. The Pending Home Sales Index, a forward-looking indicator based on contract signings, climbed 0.9 percent to 112.6 in May from a slight downward revision of 111.6 in April and is now 10.4 percent above May 2014(101.9). The index has now increased year-over-year for nine consecutive months and is at its highest level since April 2006 (113.7).

Lawrence Yun, NAR chief economist, says contract activity rose again in May for the fifth straight month, increasing the likelihood that home sales are off to their best year since the downturn. «The steady pace of solid job creation seen now for over a year has given the housing market a boost this spring,» said Yun. «It’s very encouraging to now see a broad based recovery with all four major regions showing solid gains from a year ago and new home sales also coming alive.»  

Yun does warn that this year’s stronger sales amidst similar housing supply levels from a year ago have caused home prices to rise to an unhealthy and unsustainable pace. «Housing affordability remains a pressing issue with home-price growth increasing around four times the pace of wages,» adds Yun. «Without meaningful gains in new and existing supply, there’s no question the goalpost will move further away for many renters wanting to become homeowners.»

The PHSI in the Northeast increased 6.3 percent to 93.9 in May, and is now 10.6 percent above a year ago. In the Midwest the index declined 0.6 percent to 111.4 in May, but is still 7.8 percent above May 2014. Pending home sales in the South decreased 0.8 percent to an index of 127.8 in May but are still 10.6 percent above last May. The index in the West rose 2.2 percent in May to 104.5, and is 13.0 percent above a year ago.

The National Association of Realtors, «The Voice for Real Estate,» is America’s largest trade association, representing 1 million members involved in all aspects of the residential and commercial real estate industries. 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.

The 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.