Pending home sales saw a February plunge, marking the second consecutive month of inventory-driven decline, according to the National Association of Realtors(NAR).
The NAR’s Pending Home Sales Index (PHSI) dropped 10.6% month over month to a reading of 110.3 in February. A reading of 100 is equal to the level of contract activity in 2001, when the index was bookmarked.
On a yearly basis, contract signings also declined, ebbing 0.5%.
Lawrence Yun, chief economist for the NAR, pointed to historically short supply as the culprit behind the dwindling sales figures.
“The demand for a home purchase is widespread, multiple offers are prevalent, and days-on-market are swift,” said Yun, “but contracts are not clicking due to record-low inventory.”
Yun added that “only the upper-end market is experiencing more activity because of reasonable supply,” he continued. Low for-sale inventory in the lowest tiers of the market is helping drive competition at the most affordable price points, fueling price appreciation at the market’s bottom end as well as holding down activity. Zillow recently reported that, in most of the country’s 50 largest metros, prices for homes in the bottom third of price points grew fastest year over year in February.
The fact that the most affordable homes are seeing the most rapid price growth isn’t necessarily new, but the inventory crunch is helping exacerbate the appreciation gap.
“Potential buyers may have to enlarge their geographic search areas, given the current tight market,” Yun said. “If there were a larger pool of inventory to select from – ideally a five- or a six-month supply – then more buyers would be able to purchase properties at an affordable price.”
Nationally, properties $250,000 an above have been the chief drivers of home sales for the last several months, the NAR reported. But even sales on the high end are being held back by a supply shortage, with homes priced above $500,000 to less than $1 million seeing the same low-inventory issue.
Meanwhile, demand isn’t slowing, Yun said. That leaves low inventory as the largest factor holding down sales numbers in an eager market.
“Demand, interestingly, does not yet appear to be impacted by recent modest rises in mortgage rates,” he said, noting that even with rising mortgage costs, rates in 2021 are expected to remain historically low, rising no higher than 3.5%.