After a slight month-over-month increase this past November, pending home sales dropped 4.9% in December 2019, according to the National Association of Realtors (NAR).
The NAR’s pending home-sales index, which is based on contract signings, posted a reading of 103.2 in December. An index reading of 100 is equal to the level of contract activity in 2001, when the index was benchmarked.
The pullback was a bit unexpected, given that several economists projected pending home sales to rise by 0.5%. All four regions of the country experienced a monthly drop in contract activity, with the South seeing the sharpest decline at 5.5%. Despite that, the South’s home-sales index still remains at a reading of 118.1, the highest in the nation. The indices for the Midwest, West and Northeast regions, meanwhile, are all below 100 (98.8, 93.1 and 92.4, respectively).
One of the reasons for the precipitous drop is the ongoing housing-supply shortage. December saw for-sale inventory fall to its lowest level on record, according to NAR chief economist Lawrence Yun.
The big decrease in pending home sales could spell a similar upcoming dip in existing-home sales. Because a home goes under contract a month or two before it is sold, the pending home-sales index is generally a good indicator of the direction of existing-home sales in the near future. Looking forward, Yun said that supply shortages will continue to hold back sales and he predicted that home-sales growth will only rise by about 3%.
“The state of housing in 2020 will depend on whether homebuilders bring more affordable homes to the market,” Yun said. “Home prices and even rents are increasing too rapidly, and more inventory would help correct the problem and slow price gains.”
Year over year, pending home-sales activity was still up this past December, compared to a reading of 98.7 in December 2018. Despite inventory headwinds, Yun expects home prices to continue to climb.
“National median home-price growth is in no danger of falling due to inventory shortages and will rise by 4%,” Yun said. “The new-home construction market also looks brighter with housing starts and new-home sales set to rise 6% and 10%, respectively.”