Limited inventory, falling affordability create massive headwinds
The pending home sales index dipped a slight 0.6% to an index score of 102.1 in October, which compares to a revised index score of 102.7 in September. It’s also 1.6% below the 103.8 index reached in October 2012. The benchmarked index score sits at 100.00, indicating average market levels.
But the drop in the index is not a shock to the industry. Lawrence Yun, NAR chief economist, said weaker activity was expected.
“The government shutdown in the first half of last month sidelined some potential buyers,” Yun explained. “In a survey, 17% of Realtors reported delays in October, mostly from waiting for IRS income verification for mortgage approval.”
“We could rebound a bit from this level, but still face the headwinds of limited inventory and falling affordability conditions. Job creation and a slight dialing down from current stringent mortgage underwriting standards going into 2014 can help offset the headwind factors,” he added.
Furthermore, as mortgage rates and home prices steadily rise, housing affordability is directly impacted, notedNational Association of Home Builders Chief Economist David Crowein in the latest National Association of Home Builders/Wells Fargo Housing Opportunity Index.
“Housing affordability is being negatively affected by a ‘perfect storm’ scenario,” NAHB Chairman Rick Judson said. “With markets across the country recovering, home values are strengthening at the same time that the cost of building homes is rising due to tightened supplies of building materials, developable lots and labor.”
However, housing affordability did not hinder all markets, with modest gains in the Northeast and Midwest. But the small progress was still dampened by declines in the South and West.
In the Northeast, the PHSI climbed 2.8% to an index score of 85.8 in October, and is 8.1% above last year’s levels. The index in the Midwest grew 1.2% to 104.1 in October, and is 3.2% higher than October 2012.
Meanwhile, pending home sales in the South dropped 0.8% to an index score of 114.5 in October, and is 1.5% below year ago levels. The index in the West declined 4.1% in October to a score of 93.3; it’s also 12.1% lower than a year before.
Year-over-year, pending home sales fell 2.2%, reaching the lowest point since May 2011, Anthony Sanders, a professor of finance at George Mason University, said.
“Rising house prices combined with declining real median household income isn’t helping home sales,” Sanders said. “And, of course, falling labor force participation isn’t helping, although house prices continue to rise in spite of it.”
He noted that this is “not a great pending home sales report.” However, Sanders added, “… given a declining labor force participation rate and declining real median household income, it could have been worse.”
Looking ahead, the new year is not expected to bring much improvement, with home sales projected to remain mostly flat. Additionally, NAR expects ongoing home price increases on declining inventory.
Upcoming mortgage rules in January could cause further market headwinds, Yun said. And if another government shutdown hits, the market will face some of the consequences as buyers see more of the same mortgage approval delays.
In addition, annual existing-home sales should be nearly 10% higher this year compared to last year, totaling just above 5.1 million, with a comparable volume expected in 2014.
The national median existing-home price for all of 2013 is estimated to rise 11% when compared to 2012 levels.