Pending Sales of U.S. Existing Homes Drop for Fifth Month

The number of contracts Americans signed to buy previously-owned homes unexpectedly fell in October for a fifth consecutive month amid higher borrowing costs that are denting the real-estate recovery. 
 
The gauge of pending home sales decreased 0.6 percent after a 4.6 percent drop in September, the National Association of Realtors said today in Washington. The median projection in a Bloomberg survey of economists called for a 1 percent gain in the index from the month before. 

Higher mortgage rates and price increases driven by a tighter supply of homes for sale may be keeping some prospective buyers out of the real-estate arena. Further gains in hiring and confidence would help boost the housing-market recovery as well as the U.S. economic expansion. 

“When mortgage rates went up, people got spooked and rushed into the market to seal deals,” Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts, said before the report. “The numbers that we’re seeing for pending home sales are payback for the stronger numbers earlier this year.” 

Estimates in the Bloomberg survey of 39 economists for pending home sales ranged from a decline of 2.5 percent to an advance of 3.5 percent. 

The NAR’s report showed purchases decreased 2.2 percent from the year prior on an unadjusted basis. 

The pending sales index was 102.1 on a seasonally-adjusted basis, the lowest this year. A reading of 100 corresponds to the average level of contract activity in 2001, or “historically healthy” home-buying traffic, according to the NAR.

Facing Headwinds

“We could rebound a bit from this level, but still face the headwinds of limited inventory and falling affordability conditions,” the group’s chief economist Lawrence Yun said in a statement. “Job creation and a slight dialing down from current stringent mortgage underwriting standards going into 2014 can help offset the headwind factors.” 

Two of four regions showed a decrease from the September figures, led by a 4.1 percent slump in the West. Pending sales also declined in the South and rose in the Northeast and Midwest. 

Existing-home sales are expected to reach about 5.1 million this year and be little changed in 2014, the group said. Purchases weakened in October to a 5.12 million annual rate, the fewest since June, the NAR reported last week. About 4.7 million previously-owned homes were sold in 2012.

Mortgage Rates

While rising borrowing costs may have prompted some buyers to enter the housing market and lock in contracts before rates could advance further, that stimulating effect on purchases has showed signs of wearing off. The average rate for a 30-year fixed mortgage was 4.10 percent in the week ended Oct. 31, up from roughly 3.40 percent a year earlier. 

“Many housing analysts agree with the basic premise that housing demand in the future will exceed supply,” said Samuel Landy, president and chief executive officer of UMH Properties Inc., a real-estate investment trust based in Freehold, New Jersey, on a Nov. 21 earnings call. “The stronger housing market is predicted to last for a decade.” 

Positive momentum in the housing market has underpinned the economic expansion, with new homeowners heading to retailers to snap up appliances and furniture. For Spectrum Brands Holdings Inc., a Madison, Wisconsin-based manufacturer of products like faucets, locks and garden supplies, a pickup in housing would translate to improved profits. 

The company’s “retail sales correlate to existing home sales with a 6- to 12-month lag,” David Lumley, president of the company’s home and garden business, said on a Nov. 21 earnings call, noting that his division is “benefiting from the U.S. housing recovery.” Fourth-quarter sales in that category grew 18 percent, he said. 

Economists view pending home sales as a leading indicator because they track contract signings. Existing home sales are tabulated when a contract closes, usually a month or two later.

Article curated from Bloomberg